Part 1: the Global Economic System

Part 1: The Global Economic System

In its early years the United States shielded its growing manufacturing industries from the foreign competition. This was known as “protectionism.” The Great Depression and World War II caused policymakers to rethink that policy of protectionism.

How did the Great Depression influence U.S. trade policy?

The stock market crash of 1929 and the Great Depression that followed had immediate and long-term consequences for U.S. trade policy. At the peak of the Great Depression, one in four Americans was unemployed. Millions went hungry and many lost their homes. In an attempt to protect American industries, Congress passed the Hawley Smoot Tariff Act in 1930. Raising tariffs to over 50 percent on more than one thousand items, the law reduced U.S. imports by half within eighteen months. But the act also had the unintended consequence of reducing U.S. exports. This created additional hardships, including increased unemployment and the near total collapse of the banking system in the United States and in Europe. As a result the depression already underway in Europe grew worse. The Hawley-Smoot Tariff act not only made the depression worse, it helped create the economic and political conditions for the rise of fascism in Europe.

What strategic concerns helped shape American trade policy after World War II?

World War II dramatically altered how American leaders saw the world. At the close of the war, George Kennan, the architect of the US strategy for containing the Soviet Union, maintained that there were five centers of industrial and military power: the United States, the Soviet Union, Britain, Germany and central Europe, and Japan. To stop Soviet expansion, Kennan held that the United States needed to ensure that the other four powers were pro-American and economically strong.

“A basic essential to peace, permanent peace is a decent standard of living for all individual men and women and children in all nations. Freedom from fear is eternally linked with freedom from want. [And] it has been shown time and time again that if the standard of living in any country goes up, so does its purchasing power-and that such a rise encourages a better standard of living in neighboring countries with whom it trades.”

-President Franklin D. Roosevelt

President Harry Truman and his successors followed Kennan’s recommendations. Leaders of Truman’s generation believe that free trade was crucial to the health of the US economy and the stability of the West. Recalling the negative effects of the tariffs of the 1930’s, Truman’s top priority was to restore the prosperity of American trading partners in Western Europe. The key element in promoting Western Europe’s recovery was the Marshall Plan. From 1948 to 1951, the United States supplied $13 billion (equivalent to about $85 billion in today’s dollars) in aid to the region.

Trade Agreements

After the World War II, the United States also worked to establish the General Agreement on Tariffs and Trade (GATT) to further reduce barriers to trade among non-communist nations. GATT hastened the trend toward a global trading system by setting ground rules among the twenty-three original members. From the GATT’s founding session in Geneva in 1947, when import tariffs worldwide averaged about 40 percent, the United States carried the banner of free trade through six additional rounds of negotiations.

The United States also encouraged trading partnerships in Western Europe and East Asia. In 1957, the six-nation European Economic Community emerged. The trading bloc (known today as the European Union) eliminated many restrictions on the movement of people, goods, services and capital among member nations. Today, the European Union represents an economy larger than that of the United States.

In East Asia, U.S. policies helped make Japan a regional hub of economic activity. As the Japanese economy took off, it developed close economic ties with important US allies in the region. The success of East Asia’s “four tigers”-South Korea, Taiwan, Hong Kong (now reunited with China), and Singapore-was part of a larger US effort to strengthen countries on the front line of the struggle against communism.

During their economic recoveries following World War II, the countries of Western Europe and East Asia relied on high tariffs to nurture and protect their key industries. In contrast, American tariffs were held at relatively low levels. U.S. leaders consistently championed the principles of global free trade embodied in GATT, while rejecting US participation in regional trading blocs like the European Economic Community. At the same time the United States maintained carious forms of protection for some of its industries such as textiles, agriculture, and defense.

How did free trade help with United States during the Cold War?

Free trade served both us economic and foreign policy interests. As trade barriers fell, world trade in merchandise increased from $53 billion in 1948 to nearly $1.5 trillion today. American exports soared. At the same time, access to the American market helped Japan and Western Europe recover from the World War II, thus strengthening the United States’ key allies.

“Throughout the Cold War, congress empowered presidents with trade negotiating authority to open markets, promote private enterprise and spur liberty around the world-complementing U.S. alliances and strengthening our nation.” -former US Trade Representative Robert

B. Zoellick

Top Ten Leading Trade Partners of the United States in 2013

Partner / Total Amount of Trade in U.S. Dollars (Billions)
Canada / $597
China / $503
Mexico / $460
Japan / $195
Germany / $147
United Kingdom / $107
South Korea / $100
Brazil / $74
France / $68
Taiwan / $67

What major changes have occurred since the Cold War?

With the end of the Cold War, the national security priorities that guided US trade policy and the alliance system that bound the United States to its trading partners in Western Europe and Japan have lost some of their strategic significance.

Today US trade interests are growing in new directions. In the next twenty-five years, poorer countries, often called developing countries are likely to account for about two-thirds of the increase in world imports. America’s exports to developing countries and the former Soviet bloc, which already represent 40 percent of total US exports, are expected to rise sharply.

How have U.S. leaders promoted trade in recent years?

U.S. leaders have attempted to keep pace with the future by actively promoting new trade ties. Their most notable achievements have been in the World Trade Organization (WTO) and through regional agreements such as the North American Free Trade Agreement (NAFTA). The WTO and NAFTA are both designed to reduce barriers to international trade, such as tariffs, quotas, and government subsidies. The scope of the WTO, which grew out of GATT, is worldwide, with a membership of more than 148 nations in 2005. NAFTA is limited to the United States, Mexico, and Canada.

More than any previous trade issues, NAFTA and the WTO pushed news about trade policy from the business section to the front page. The congressional debate on NAFTA in the fall of 1993 – followed a year later by the vote on the WTO – drew the heavyweights of business and labor into the ring, and captured the national spotlight for weeks. Ongoing demonstrations by thousands of activists at meetings of the WTO around the world are in the news. Not since the Civil War, when the industrial North and the agricultural South squared off in Congress over import tariffs, have trade issues generated such intense interest.

What is the WTO’s Dispute Settlement Body, and what are some main charges that countries have made against each other?

On of the most controversial aspects of the WTO is its Dispute Settlement Body (DSB). The DSB is a committee that has the power to decide the outcome of a trade dispute. Any WTO member can charge another WTO member with violating the organization’s trade policy and the dispute will be argued as a court case would be.

Once the DSB has decided the case, the “losing” member is directed to take action to bring its laws, regulations or policies into conformity with WTO agreements. The country is given a “reasonable period of time” to do so. If the losing party fails to restore the conformity of its laws within the “reasonable period of time”, the DSB may—on an exceptional basis—authorize a successful complainant to take retaliatory measures to induce action on the part of the losing party. This is very rare. Almost all WTO members “voluntarily” implement DSB decisions in time.

What changes has the United States pushed in the recent WTO negotiations?
As part of the approval of the WTO pact in 1994, the U.S. government appointed a panel of judges to review WTO decisions. If the panel finds that the U.S. has been subjected to three unfair rulings over any five-year period, Congress could reconsider support for the trade agreement. By early 2005, the United States has filed seventy-eight complaints against unfair trading practices by other countries. Of the forty-eight that have been settled, forty-four have been in the United States favor. Although the United State’s complaints have been successful, it has also lost half the complaints against it.

One complaint concerns the issue of subsidizing, or providing government financial assistance. Many countries, including the United States, subsidize various industries in order to help those industries compete in world markets. In agriculture especially, European and American governments heavily subsidize producers. These producers are thus able to sell their products at prices below what they would be able to without the subsidies.

Another problem is “dumping”, in which companies flood markets, particularly in developing countries, with goods priced far below what they would cost in the country where they are produced. Developed Countries like the U.S. also complain about dumping on the part of developing countries like China. Dumping disadvantages producers who are not subsidized. These producers lose business to the dumpers, who are able to sell below market value.

Examples of Recent Trade Disputes

European Union: In October 2004 the United States filed a complaint in the WTO against EU subsidies of the Airbus aircraft manufacturer. The EU subsidized the Airbus Company, claiming that Airbus is an “infant” industry. The United States challenges that claim, now that airbus sells more large aircraft than Boeing. Boeing, an American company, has been losing out to airbus in recent years. The European Union also filed a complaint against the United States, for similarly offering subsidies in the form of tax breaks and funding assistance to Boeing.

Canada: Canada is the United States largest trade partner. One product that the United States purchases from Canada in large amount is lumber. For several decades the neighbors have argued about fair policies regarding pricing and subsidies of lumber moving across the border. The United States has argued that the prices the Canadian government charges lumber companies to cut down trees on government land is artificially low, which means that those companies can sell in the United States at rates lower than US companies. Canada counters that the United States imposed unfair taxes on Canadian lumber as retribution for the lower prices Canadian companies charge. In January 2004 the WTO found in favor of the United States.

China: in the past, the United States reviewed China’s trading status annually, often limiting trade because of human rights abuses. In September 2000, the United States Congress approved permanent normal trading status for China, a policy which helped China to join the WTO. Some argue that by doing so the United States gave up an opportunity to steer China toward greater openness and freedom. Others contend that the WTO regulations and the new free market forces will drive the country towards democracy. The United States has filed several complaints with the WTO against China’s trade policies, which it believes hurt U.S. exports to China.

Many people have called attention to both subsidies and dumping as unfair aspects of trade policy. The WTO has not outlawed dumping. Instead it has outlined how countries may respond or protect themselves against dumping.

The office of the United States trade representative (USTR), which represents US interests in negotiations in the WTO and other trade alliances, continues to meet with trade specialists from other countries on a regular basis. In the 2001 the General Council of the WTO met in Doha, Qatar to set an agenda for the next stage of WTO development. Since then, trade negotiators have been meeting every year to iron out the plan.

In July 2004, members of the WTO met in Geneva, Switzerland. In Geneva the USTR pushed for three reforms in global trade policies. First, the United States helped to negotiate a series of reforms that would reduce tariffs and subsidies on agricultural products in many countries including the United States and Europe. Second, tariffs would be reduced on manufactures goods in the United States for several years. Finally, WTO members in Geneva agreed to being opening up opportunities for services (such as insurance and financial management) to function more easily in several countries.

Overall, the USTR seeks to continue to open markets and reduce barriers to free trade. Successive administrations have believed that such measures will assist American families and will also help bring people out of poverty worldwide.