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The Evolution of International Trade Agreements Trade and regulation have been a theme and counterpoint through much of recorded history, each advancing at times when the other receded. In the past, regulation was imposed by self-aggrandizing territorial units that sought to use trade for their own purposes . Today trade agreements between nations are a permanent factor in international commerce, and as a result the nature of regulation is changing. In this series of essays Gilbert R. Winham explores the nature of international trade and regulation as it is evolving today. He begins with a historical perspective, and then considers the various stresses to which the current system of international trade is subject. He discusses the nature and function of the GATT and assesses its effectiveness. Next he turns his attention to the latest round of talks, which broke down abruptly in Brussels at the end of 1990, and concludes with a look forward to the future of the GA TT specifically and international trade in general . Today as economic boundaries are merging, dividing, and reforming, international trade plays a critical role in global stability. Winham offers an insightful analysis of how the current situation has developed and where it might lead . is a member of the Department of Political Science at Dalhousie University .

GILBERT R. WINHAM

The Evolution of International Trade Agreements Gilbert R. Winham

UNIVERSITY OF TORONTO PRESS Toronto Buffalo London

© University of Toronto Press Incorporated 1992 Reprinted in 2018

Toronto Buffalo London Printed in Canada ISBN 0-8020-2819-5 (cloth) ISBN 978-0-8020-7691-5 (paper)

Printed on acid-free paper

Canadian Cataloguing in Publication Data Winham, Gilbert R. The evolution of international trade agreements Includes bibliographical references. ISBN 0-8020-2819-5 (bound) ISBN 978-0-8020-7691-5 (paper) I. Commercial treaties - History. 2. Foreign trade regulation - History. 3. Tariff - Law and legislation - History. I. Title. K4600.W56

1992

382'.9'09

C92-094701-8

Contents

Preface vii 1 Lessons from History 3 2 The Risk of Breakdown in the International Trade System 23 3 Modem Trade Agreements: The 4

GATI

Regime 43

Negotiating Trade Agreements: The Uruguay Round 71

5 The International Trade System of the 1990s 107 Bibliography 133 Index 145

Preface

This book is an extension of my Bissell lectures presented at the University of Toronto in the spring term of 1991, while I served as the Claude T. Bissell Visiting Professor of Canadian-American Relations. The Bissell Chair is a gift of some 10,000 members of the alumni of the University of Toronto living in the United States. The Chair honours a man who served for thirteen years as president of the University of Toronto, and who through his distinguished academic career demonstrated his concern for a strong and healthy relationship between the two northern North American neighbours. No subject is more fundamental to that relationship than international trade. The past half-decade has been a period of heightened awareness of trade policy in Canada, and elsewhere in the world. The GATI Uruguay Round trade negotiation started in 1986, and it continues at this writing. In North America, the Canada-u.s. Free Trade Agreement was concluded in 1988, and another regional trade agreement including Mexico was initiated in 1991. The bilateral agreement between Canada and the United States sparked a heated debate in the Canadian public that was reminiscent of an earlier age when the tariff was a Vil

staple of electoral politics. For modem scholars of international trade, the sudden attention to trade policy was wholly unexpected. Studying most issues of public policy is a little like researching earthquakes: tranquillity is the normal state, but when activity occurs, interest becomes insatiable, and anyone possessing a passing knowledge of the subject experiences the flattery of public attention. Such attention carries with it an obligation to offer an explanation of current events. This little book attempts to put into perspective the phenomenon of international trade agreements. These agreements are not new, but in the contemporary period they are taking on an increased importance because they have the potential to remake our economic landscape. In the spirit of Toynbee' s 'How has this come out of that?' this essay briefly explores the history of international trade agreements and examines the purpose they serve both in the pre-modem and modem worlds. Included in this story is the GAIT agreement, which today constitutes a governing regime within which much international trade policy is conducted. The Uruguay Round currently under way is a test of that regime, and its success or failure will inevitably influence the process of trade agreements in the coming decade. I wish to acknowledge the considerable help I have received in writing this volume. I received financial support for the research from the Social Science and Humanities Research Council of Canada. Elizabeth De Boer and Luke Ashworth provided research assistance, Vivian Chan and Paulette Simard helped prepare the manuscript, and Joanne Childs prepared the index. I am deeply grateful for their efforts. Much of the research on the Uruguay Round was conducted by personal interviews with negotiators from various countries, but a viii

promise of anonymity prevents me from thanking them publicly. I can thank, however, several from the GATI Secretariat who occasionally took time to help an academic colleague understand the finer points of GATI procedures: Alain Frank, David Hartridge, Claude Mercier, Frieder Roessler, Elizabeth Shaffer, and Jan Woznowski. I profited from their counsel, but they are not responsible for errors I may have made. While serving in the Bissell Chair I was located in the Centre for International Studies, and received much professional support and guidance from Dr Sylvia Ostry, chairman; Professor Leonard Waverman, director; Mary Lynne Bratti, executive assistant; and Olenka Grygier. Especially; I would like to thank my academic colleagues at the University of Toronto who took an interest in my Bissell lectures and from whose scholarship I have profited. I hope by indicating their names that I do not risk offending some others by omission: Juanjai Ajanat, Patrick Cirillo, Stephen Clarkson, William Graham, Gerald Helleiner, Robert Howse, John Kirton, Werner Meissner, Sylvia Ostry, Lou Pauly, Abraham Rotstein, Alan Rugman, Edward Safarian, Grace Skogstad, Janice Stein, Michael Trebilcock, Vernon Turner, and Leonard Waverman.

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The Evolution of International Trade Agreements

CHAPTER ONE

Lessons from History

It is remarkable how quickly the temper of international relations can change. In the fall of 1989 the world witnessed a peaceful system change of the sort that previously had only been possible through major warfare. Overnight, communism passed from the scene in Eastern Europe, the Cold War was pronounced dead, and everything seemed possible. Just three years later, things seemed much bleaker. Reform propelled itself into collapse in the Soviet Union, bringing with it economic chaos and the fear of civil war in what we recently thought of as one of the world's two superpowers. Meanwhile, persistent economic recession in the other superpower eroded the foundations of that nation's economy, and accelerated doubts about its leadership, which has been a pillar of the world economic system since the Second World War. Events in the Soviet Union and the Persian Gulf largely obscured the efforts in 1990 to conclude the GAIT Uruguay Round negotiation, perhaps demonstrating yet again that crisis and war are the dominant factors in international relations, while trade and economic relations are recessive elements. In December 1990, the progress of the Uruguay Round was abruptly halted at 3

the abortive GATI ministerial meeting in Brussels, which was intended to conclude the negotiation. That breakdown, and the subsequent difficulty in picking up the pieces in 1991, ended the possibility of completing the Uruguay Round by the original deadline set by the u.s. Congress. At risk was a negotiating effort that had extended since 1986 in the largest and most important trade agreement ever attempted in international relations. By 1992 the prospects for the Uruguay Round were still uncertain. Although the GATI has set up some seven multilateral trade negotiations since 1947, it has never before experienced a total failure. Should the Uruguay Round fail, the capacity of sovereign economic powers to jointly manage their economic exchanges would be called into question. The role of trade-liberalizing agreements has often been summed up in what is known as the bicycle theory of trade negotiation: that is, forward momentum must be maintained or stability is lost. That momentum was lost in the Uruguay Round cannot be denied. Whether the world will lose economic stability (and with it, arguably, prosperity and even peace) is a larger question that will be addressed later. What will be attempted in this chapter is a stock-taking of the very process of international trade agreement itself. What is the role of international agreements in the modern nation-state system? Trade in human history In exploring an idea it is often useful to pursue it to its origins. In the case of trade agreements our research would take us far back in history. The reason is that trade agreements follow trade, and trade, as F.A. Hayek reminds us, 'certainly came very early, and is far older 4

than any other contact among remote groups that can now be traced.' 1 The earliest form of trade has been chronicled by the Finnish sociologist Ragnar Numelin. 2 Called the 'silent trade,' it was conducted by primitive peoples who were too fearful to establish direct contact with their trading partners. Instead, one party left an object to be traded in a clearing, and retired; later, the other party picked up the object and left something of comparable value in return. This earliest form of trade was not commercial. Instead, it established communication, and generated information about a wider human environment outside each particular tribal grouping. Today, trade continues to serve a communication function, for we can imagine how much poorer we would be in an informational sense if by decree our borders were to be closed to the exchange of foreign goods and services. Even the silent trade might - in science fiction at least - have its modem applications. For example, what would the reaction be if a strange spacecraft were to land, and humans were confronted with alien creatures about which they were profoundly ignorant, and therefore apprehensive. In this circumstance, it is plausible that some exchange of real goods might signal the start of a communication process. 3 Trade was important to many ancient and medieval powers. Indeed, some great powers such as Persia, Rome, or France could be relatively indifferent to trade because of their strong agricultural base. But for many, I The Fatal Conceit: The Errors of Socialism, 39 2 The Beginnings of Diplomacy: A Sociological Study of Intertribal and

International Relations

3 It is interesting to speculate what object one might choose to initiate such an exchange. My own suggestion would be a transitor radio, tuned,faute de mieux, to the Canadian Broadcasting Corporation.

5

including Athens, Ptolemaic Egypt, the Italian city states of Venice, Florence, and Genoa, and the German Hanseatic League, trade lay at the centre of state revenue and state power. Nowhere was this clearer than in ancient Athens. Although Aristotle thought that autarchy, or self-sufficiency, was basic to the philosophy of the polis, in fact Athens developed through commercial activities and at its height was wholly dependent on trade.4 Aristotle's misconception may be the first time, but surely not the last, that a public philosophy about trade was at variance with the facts; if one wanted a mundane modem example, one could compare the rhetoric and the reality of voluntary export restraints (VERs). 5 Athens exported silver and olive oil, and the boundaries of its trade have been charted over time by the shards of pottery urns that have been discovered throughout the Mediterranean region. In return, the Athenians were dependent on the import of grain, which was essential to maintain the population of Athens in an arid region. By all accounts the Athenians appreciated aggressive exporters. The ancient historian Herodotus relates that, in an earlier era, traders went down to Babylon from Armenia on the River Euphrates in round boats made of willows, reeds, and hides.6 The current was so fast that the traders needed only to steer. In addition to their goods the traders took pack-animals. When they reached Babylon the traders sold their wares, dismantled their boats and flogged the willows and reeds, and then 4 Hayek, The Fatal Conceit, 45. See also M. Rostovtzoff, The Social and Economic History of the Hellenistic World. 5 See the criticism of the Semiconductor Trade Agreement in Robert Z. Lawrence and Charles L. Schultz, 'Evaluating the Options,' 1-41, 29-31. 6 The Histories (I : 194), 84-5

6

carried the hides back up the river on the pack-animals in order to make the next boat. Apparently, it was all accomplished without assistance from an Export Development Corporation. 7 What was the role of trade in the classical period? Principally it was the creation of wealth, which was the product of specialization, division of labour, and exchange. With wealth came social and cultural capacity, a point on which Thucydides was absolutely clear in his observation on the wealth of Corinth. 8 The Greeks used their wealth to create a remarkable civilization, and then later misused it in fratricidal and self-destructive warfare. But trade also played an important non-economic role in the life of the ancient Greeks. It created a re-orientation to a wider world, and in the process established 7 The adventure that was foreign trade is perhaps lost on our modem generation. To appreciate the sense of adventure and misadventure, one can examine the short history of the Alice Muir, a 135-foot sailing barque built in the Shelburne, Nova Scotia, area: 'Her first trip was to New York where she was chartered to load oil for a port in the Baltic. After she arrived, she became frozen in all winter and was so badly damaged by ice, that it cost 300 pounds for repair. From the Baltic, she proceeded to Newcastle, England, to load coal for Genoa. At Newcastle, she was run down by a coal barge and retained there 4 months for repair. Capt. Rufus Acker had his wife with him and she became ill and the vessel remained several weeks longer. At Genoa, rags were loaded for South America. At South America, she was chartered to go to Mauritius to load sugar for Liverpool, England. From there to Shelboume in ballast. Capt. John Anderson, who later resided at Jordan Bay, then took command and proceeded to Savannah in ballast to load pitch pine for South America. From there she carried a load of mules to Mauritius. While detained there in quarantine, she caught fire. The vessel was sold by a decree of the Vice-Admiralty court of Mauritius on January 29, 1879 to pay for repairs and necessary supplies at Port Louis, Mauritius.• From the exhibit presented by Shelburne Coast Guard, 1933; Shelburne Museum, Shelburne, Nova Scotia 8 The Peloponnesian War, 43

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value and custom in intergroup relations. Trade permitted a concentration of population in cities, and the resulting synergies were important building-blocks in the development of Greek culture. Finally, trade created what Hayek has called a self-generating order that organized the collective economic efforts of human beings into a vaster social complex than could ever have been consciously engineered by the participants in that system.9 Such an order formed an important basis for political relations in an anarchic interstate system. However, that order was not sufficiently compelling to prevent the Peloponnesian War, an event which the historian Arnold Toynbee described as the breakdown of Greek civilization. 10 It is interesting to speculate whether trade has a similar meaning for the modem world to what it did for the ancients. Of course, there is much to account for in the passage from the ancient to the modem period. First is the pattern of trade itself. Historians can note an early continuity of trade from Asia and North Africa to Greece and then Rome, which broke down almost completely after the dissolution of the Roman Empire. From the sixth to eighth centuries in particular, social and even physical communications between European communities were severed, trade was severely disrupted, and the period often referred to as the Dark Ages settled on Europe. Trade recovered very slowly in Europe after this experience; and from a gradual resurgence which

9 Hayek notes: 'The existence of trade in these early times is incontestable, as is its role in spreading order' (The Fatal Conceit, 39). 'To understand our civilization, one must appreciate that the extended order resulted not from human design or intention but spontaneously' (6). 10 A Study of History, 262

8

took place over centuries, the modem trading world was developed. A second factor was the development of ideas. When examining modem trade we must recall that we are looking at a phenomenon that has been the subject of extensive analysis. The core of this analysis was the argument that, given unrestricted opportunities to trade abroad, specialization and exchange would maximize the welfare of nations participating in that trade. This argument was further elaborated by Ricardo as the theory of comparative advantage, which states roughly that each nation should specialize in and export its least-cost products, based ultimately on its relative endowment in the factors of production. The underlying concept is simple, and indeed the economic value of the division of labour and exchange was even noted by the Greek philosopher Plato. 11 Modem developments such as the growth in trade between countries having similar industrial structures (known as intra-industry trade) have created some difficulties for the theory of comparative advantage. However, the basic virtue of specialization and exchange has not been fundamentally challenged by modem economic theory. It would appear, then, that trade does have a similar meaning for the modem world to what it had for the ancients. Most important, trade seems to create wealth, and the buoyant conditions from the Second World War onward appear to confirm this assertion. Trade has become progressively liberalized since the formation of the GAIT in 1947, and in most years it has led the 11 Plato noted: 'Quantity and quality are therefore more easily produced when a man specializes appropriately on a single job for which he is naturally fitted, and neglects all others' ; The Republic, 118-19. The passage is cited in Jagdish Bhagwati, Protectionism, 24.

9

growth in world output over the same period. While economists will debate whether trade has caused growth, or the reverse, it seems undeniable that trade has been associated with the process of generating wealth. As for its non-economic effects, it is likely that trade does as much to structure our wider social order as it did for the ancient Greeks. This is surely true at the level of the nation-state, for as the political scientist Thomas Schelling has observed, 'Aside from war, trade is the most important relation countries have with each other.' 12 As for the level of the individual citizen, one can consider how much one's own point of reference would change (and not only economically) if all those products not made in one's own country were to be removed from one's possession. Regulation of trade

If the only subject that had to be taken up in a discussion of trade were trade itself, the task would not be nearly so large. But trade is only half the story; government is the other half. This reality has been superbly captured in the writings of John Condliffe. 'The beginnings of trade,' writes Condliffe, 'are to be found in the enterprise of groups and individuals, but regulation and taxation of trade are almost as old as trade itself. In tracking history, if enterprise is the theme, regulation is the counterpoint. As soon as the track begins to be beaten out, established authority intervenes to control and levy tolls upon the traders.' 13 12 Thomas Schelling, 'National Security Considerations Affecting Trade Policy,' 723-37, 736 13 The Commerce of Nations, 27

10

Now students of political economy will recognize that the themes identified by Professor Condliffe as enterprise and regulation have appeared frequently in the academic literature, although under different disguises. Among the different formulations that abound are the market vs. the state, or commerce vs. conquest, or even money vs. power. 14 Suffice it to say that the distinction between the economy, which is grounded on the free-market activity of individuals, and the polity, which is grounded on the authority of the collective, is well established in international political economy. Early trade, as we have seen, was a primitive exercise in economic enterprise. Equally primitive were the means of regulating trade. The earliest were tolls, which apparently were not inspired by any complicated economic theory. Tolls were payments or tribute, exacted by local leaders for the permission to pass through territory, or to trade, or simply for protection. In an earlier era, tolls were one step above piracy, and they added hazard to the trader's already hazardous life. Although they were not born of theory, tolls may have taught an important lesson in economic theory: namely, the law of diminishing returns. Where tolls were excessive, they prompted a rerouting of economic activity, a principle that has not escaped modem multinational corporations as they contemplate corporate income taxes in different jurisdictions .. Thus, the contest between enterprise and regulation that Condliffe has traced to the beginning of organized society has its resonance in modem life. 14 See Robert Gilpin, The Political Economy of International Relations: Richard Rosecrance, The Rise of the Trading State: Commerce and Conquest in the Modem World; and Charles P. Kindleberger, Power and Money: The Economics of International Politics and the Politics of International Economies.

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Tolls were a form of taxation, and they were a serious power, for as the U.S. Supreme Court once opined: 'the power to tax involves the power to destroy.' 15 From earliest time tolls were an expression of military control and often political sovereignty. The rule was simple: if one controlled territory one could exact tribute through tolls at will. The result was a great hindrance to trade, particularly in the early Middle Ages when Europe was politically divided into small jurisdictions. It should come as no surprise that - as the great states of Europe were in the process of forming - many contests arose between local leaders and kings over the control of territory and trade. The consolidation of nation-states, which took place from the fourteenth century onward, stimulated both local and foreign trade. Thus Condliffe proposed that 'the growth of trade and its regulation is correlated with a stability of government exercising authority over wide areas.' 16 This proposition is undoubtedly correct for the late Middle Ages, and it would probably hold true for Rome, when the Romans, through the expedient of empire, simply caused the adjective in 'foreign trade' to fall into disuse. But Condliffe's proposition does not appear correct about ancient Greece, where Athens and other city-states co-existed in a state properly described as anarchy (that is, without extended government); nor does the proposition hold true for the early Renaissance Italians or the many other political entities which conducted trade far beyond the limits of their hegemony. For these cases which of course mirror the circumstances we face in our 15 John Marshall, McColloch v. Maryland, 4 Wheaton, 316, 431 (1819). Excerpted in Noel T. Dowling, Cases on Constitutional Law, 5th ed. (Brooklyn: Foundation Press 1954), 185-205 16 Condliffe, The Commerce of Nations, 28

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own times - stability would have to be based on a different principle than the exercise of unilateral authority over wide areas. Just as history has recorded an increasing sophistication of international trade, so also has there been progressive sophistication in the methods of trade regulation. Tolls were for barbarians. A more modem method of regulation was the tariff, or customs duty, which we now recognize as a percentage tax added to the price of imports. Tariffs of course are still with us today, but they, and the customs services that administer them, are among the oldest functions of government. Perhaps Adam Smith had the final word on customs when he defined them, simply, as customary. Said Smith: 'They seem to have been called customs, as denoting customary payments, which had been in use from time immemorial. ,17 Smith also noted that the payment of customs fell heavily on foreign merchants, 'in order to give our own merchants an advantage both in the home and the foreign market.' Where tolls might have a random or opportunistic flavour to them, tariffs tended to reflect organized government policy. Typically, tariffs were arranged in tariff schedules, which can yield - if one has sufficient toleration for tedium - fascinating information about the state of political economy of nations in different periods. An example of a tariff schedule from the distant past is as follows: 'Merchandise ... shall be liable to the payment of toll alike when exported and imported. Imported commodities shall pay 1/5 of their value as toll. Of flowers, fruit, vegetables ... and dried 17 An Inquiry into the Nature and Causes of the Wealth of Nations. vol. 2,

78-9

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meat, the superintendent shall receive 1/6 as toll. As regards conch shells, diamonds ... and necklaces, experts acquainted with the time, cost and finish of the production of such articles shall fix the amount of the toll.' If this tariff schedule seems a bit primitive, at least it comes by that condition honestly. It was extracted from Kautilya' s Arthasastra, a manual for Indian statecraft written arguably between the fourth and third centuries BC! 18 One should note, however, that the provisions empowering experts to fix the amount of a toll reflects the concept of valuation for customs purposes. This concept is utterly contemporary, and those familiar with GA TT negotiations will recall that an international code was concluded on this subject in the Tokyo Round in 1979. To find a concept so modem and technical in such an ancient document is remarkable. The purpose of early tariffs, whether on imports or on exports, was to raise revenue. This they did with some effectiveness, for by the beginning of the eighteenth century duties on imported goods had come to be the chief source of revenue in European countries. A further function of the tariff was to protect domestic producers from foreign competition, a practice which Smith had noted with disapproval. 19 Both revenue and protection were important aspects of a more general policy practised at the time called mercantilism. Mercantilism entailed the engineering of an excess of exports over imports, which if it could be accomplished enabled a country to accumulate money, and therefore, presumably, power. After the tum of the twentieth century, governments found other more effective means to 18 Page 126 19 An Inquiry, esp. chap. 7, 'Conclusion of the Mercantile System'

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raise revenues - principally the direct tax on incomes and the revenue function of tariffs became much less important. As proof of this, one can recall that in the recent debate in Canada over the FTA, much was made of the loss of protection that would be suffered by Canadian industries and Canadian workers, but very little of the fact that the Canadian government would lose tariff revenues as the country removed its import duties on U.S. products. As if to demonstrate the continuing ingenuity of regulators, the twentieth century has seen the emergence of a new form of protection, collectively known as nontariff barriers (NTBs), or non-tariff measures (NTMs) in polite GATI terminology. Today, non-tariff measures abound in the trade world, both within and outside the GATI framework. It is unlikely that these measures constitute anything fundamentally new in the trading world, for as we have already seen with customs valuation, the mechanism for protection in many cases was known even to the ancients. However, the concern today over reducing protective trade regulation is directed mainly at various kinds of non-tariff measures, and this is because regulation by tariffs has been practically eliminated (at least between developed nations) by successive trade agreements under the GATI. But this is getting ahead of the story.

Trade agreements To this point we have examined trade, or enterprise; and then we examined regulation, which is the counterpoint to trade. Next we tackle trade agreements. To cut the story short, one can say these agreements started as simple undertakings between peoples as to how their 15

commercial relations would be conducted. In modem times they have become a form of international regulation in their own right, aimed at suppressing other unwanted national regulations. How did one get from then to now? First, it can be observed that trade agreements are almost as old as trade itself. For example, in the cuneiform tablets found at Tell el-Amama - which give a picture of the external relations of the Egyptian royal family of 2500 BC - reference is made to a commercial treaty between the kings of Egypt and Babylonia. The gist of the treaty was that 'any Mesopotamian travelling in Egypt with merchandise shall pay certain duties to the King of Egypt, and should the traveller, whether a trader or otherwise, refuse, the duty shall be exacted by force.' 20 Mentioned among the articles upon which duty shall be levied are gold, silver, oil, clothing, and other objects of value. The rest of the tablet is obliterated, and no mention is made of quid pro quo. The account then reverts to a subject that apparently was of much greater interest to prehistoric Egyptian kings, namely, the trade in marriageable daughters. Fortunately, there are some areas where we have managed to part with our past. 21 20 The Tell El-Amarna Tablets in the British Museum, xxviii 21 It appears that trade in marriageable daughters may have introduced some unique problems in international commerce. The tablets record that the King of Egypt requested the daughter of the King of Northern Babylonia in marriage, but the reply came back: 'You wishest for my daughter to wife; but from the time when my father gave thee my sister to wife, no man hath seen her, and none knoweth whether she be alive or dead' (xxvi). Not unreasonably, the king was disinclined to send another wife, until he had received a satisfactory report on the first. But the problem was not easily solved. The king sent a messenger; but the lady had left as a young girl and had since matured, and the messenger was unable to

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From history it is clear there is a close relationship between trade and commercial treaties. Numelin reports that among primitive people trade - along with war served as a principal engine of diplomatic behaviour. 22 Were we to borrow from the terminology of Konrad Lorenz, we could see trade as one of the great constructors of modem diplomacy. 23 Trade continues to perform this function today, for surely the European Community (with its development of an executive function) and the GAIT (with its rudimentary development of a judicial function) are among the most advanced diplomatic structures that the world possesses. Nor is it a bad thing that trade has taken the lead in establishing diplomacy. No less a figure than Sir Harold Nicolson has reminded us of the desirable values (one might even say English values) that commercial relations have brought to diplomacy, such as common sense, continuity, the search for mutual gain, and even charity. In other words, the values of shopkeepers, not of warriors. 24 A second point to appreciate in the evolution of historic trade agreements to their modem counterparts is that trade itself has been conducted between self-interested actors that have used the regulation of trade to promote their own interests. Over time, it became apparent that a measure of international agreements could alleviate some of the worst effects of competitive national regulation. In many places trading customs were established, which then developed - like the law merconfirm he had been presented to the right person. Perhaps this incident could be viewed as an early example of verification in trade diplomacy, which has more recently been an issue in arms-control negotiations. 22 Numelin, The Beginings of Diplomacy, see esp. chap. 10, 'Trade as a Promoter of International Relations' 23 On Aggression 24 See Sir Harold Nicolson, Diplomacy, 24-7.

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chant of medieval times - into fairly elaborate codes of commercial law.25 Later, formal agreements became commonplace, and by the nineteenth century treaties of commerce and navigation were in existence between all the largest trading countries. A major watershed in the evolution of trade agreements occurred in the mid-nineteenth century. The French free-trade movement, led by Michel Chevalier, sought to convince the French manufacturers and the government of Louis Napoleon to follow the British example of free trade that was established in 1846 by the repeal of the protectionist Com Laws. The French activists met with little success until the opportunity arose to incorporate a tariff negotiation in a commercial and political treaty with Great Britain. The result was the Anglo-French (or Cobden-Chevalier) treaty of 1860, which was instrumental in the later opening of the French market to British manufacturers. This treaty demonstrated that trade agreements could be an effective means of trade liberalization (a point not easily accepted by the proponents of unilateral free trade in Britain), and it set the stage for the deployment of trade negotiation in the twentieth century. The third factor in the evolution of trade agreements was a specific event that occurred during the Great Depression. But first it is necessary to account for the years between 1860 and 1930. The flowering of free trade which occurred in Britain in the mid-nineteenth century found only a fragile footing in Europe. By 1870, depressi9n and war had turned Germany and France resolutely protectionist, and they continued this 25 See Leon E. Trakman, The law Merchant: The Evolution of Commercial law.

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policy into the next century. The Americans, too, were protectionist by conviction. The First World War and its unfortunate aftermath deepened worldwide economic despair, and a crisis in agricultural production in the late 1920s compounded the misery. Throughout the 1920s tariffs were at very high levels. Then, the U.S. Congress passed the Smoot-Hawley Tariff Act of 1930, which represented a further step in the long movement of nations to close off their economies to foreign imports. Retaliation by other countries was immediate, and world trade fell by about two-thirds by the mid-1930s. Four years later the U.S. Congress passed the Reciprocal Trade Agreements Act (RTAA) of 1934. This act was a signal event and it produced what could be reasonably called a revolution in international trade policy. 26 Its central feature was to empower the president to lower tariffs up to 50 per cent from Smoot-Hawley levels in the course of trade negotiations with other countries. The act thus transferred tariff-setting policy from the Congress, which has the constitutional authority to regulate commerce, but which had proved incapable of resisting constituent demands for higher protection. From the standpoint of international politics, the act was revolutionary in that it implicitly accepted that setting tariff rates should no longer be a matter of unilateral policy taken by a nation-state, but rather should be a bilateral issue to be settled through negotiation. Other nations willingly followed the U.S. lead, and thus the act produced a sea-change in international commercial policy. In 1947, the GATT (General Agreement on Tariffs and 26 Henry J. Tasca, The Reciprocal Trade Policy of the United States: A Study in Trade Philosophy

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Trade) was created. We normally think - following Dean Acheson's phraseology - that the early postwar period represented the creation of a new regime. 27 This is not the case with the GAIT. The GAIT, which will be examined further in chapter 3, is a forum for negotiation plus a set of trading rules. As to the former, the GA IT simply carried on the assumption from the RTAA that trade policy would be made through negotiation; as to the latter, many of the rules contained in the GA IT were drawn from past commercial practice and simply codified in the General Agreement. The main contribution of the GAIT has been to promote a concept of multilateral negotiation, which, over time, has been especially successful in reducing the high tariffs left over from the 1930s, but which has been only moderately successful in writing new international trade rules. Conclusion

Now to sum up. Trade (or enterprise) and regulation have been a theme and counterpoint through much of recorded history: that is, when regulation receded, trade flourished; and when regulation was intense, trade languished. This relationship developed because regulation was imposed by self-aggrandizing territorial units that sought to use trade for their own purposes. Today, however, with the development of trade agreements between nations as a permanent factor in international commerce, the face of regulation has changed. Now regulation is pitted against regulation; that is, the regulation flowing from international agreements that seeks to promote and stabilize economic exchanges between nations is ranged 27 Dean Acheson, Present at the Creation: My Years in the State Depanment

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against the regulation of national governments that often seeks to restrict those exchanges. The issue today is not pure free trade, whatever that might mean. Regulation is inherent in our highly ordered lives, and the irony is that to reduce regulation of one kind it takes regulation of another kind. Instead, the important question is: Where does the regulation come from, and is its purpose to reduce or to expand the scope of our lives and economic activity? This chapter began by asking the question: What is the role of international trade agreement in the modern nation-state system? The answer is to reduce protectionist national regulation, but even more important to reduce the uncertainty and unpredictability of the international trade regime, and to promote stability. The greatest cause of uncertainty in the contemporary trading system comes from the self-serving actions of self-interested nation-states. Thus, it can be said that one nation's sovereignty is another nation' s uncertainty. In assessing the passage of international commerce from the insularity of the Middle Ages to the more cosmopolitan European state system, Professor Condliffe observed that 'the growth of trade and its regulation is correlated with a stability of government exercising authority over wide areas.' 28 An analogy can be made between our efforts today to establish a wider structure of commercial order and the comparable efforts of nation-states to achieve the same thing in an earlier period. Then as now, the task will require an extension of the functions of government, but our task is more difficult because it requires an extension of international and not national government. 28 Condliffe, The Commerce of Nations, 28

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CHAPTER TWO

The Risk of Breakdown in the International Trade System In the first chapter, it was apparent that the theme of enterprise vs. regulation (or economic vs. political behaviour) has been a constant refrain throughout the history of human trading relations. Furthermore, trade agreements were established by political units to create joint rules, and thereby to promote stability and certainty in trading relations. Stability and certainty are critically important in international trade because the system itself is anarchic; that is, the international system is characterized by an absence of government, and nations within that system are sovereign and relatively unconstrained in the pursuit of their own interest. 1 Anarchy presents a paradox in the international economic system. Assuming that governments are motivated by free-market principles, nations are expected to foster private competition in international commerce, which will produce - through specialization and trade the greatest welfare for the participants in the system. However, nations are also expected to eschew policy I See Hedley Bull, The Anarchical Society: A Study of Order in World Politics.

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competition in international commerce, first by avoiding policies that would give unreasonable advantage to their own citizens and second by promoting joint rules to increase the integrity of the overall system. The history of trade relations demonstrates that policy competition has been more the norm than cooperation, for there have only been two periods in history (one of which is our present postwar system) when nations' economies were relatively open to each other. History shows that in anarchic systems, policy cooperation is an unnatural act; and it takes thought, analysis, action, and leadership to achieve it. In anarchic systems, breakdown is always a possibility. For example, the nineteenth century European political system, which was competitive and conflictual at the best of times, broke down completely in the First World War. Similarly the international trade system suffered a collapse in the early 1930s. Both these events were calamities, and one would hope that we could avoid their repetition in the future. Yet the contemporary trade system again witnessed a setback in the collapse of the Brussels ministerial meeting designed to bring the GATI Uruguay Round to a successful conclusion. Since its inception, the GATI has not experienced as great a failure as it suffered in Brussels, and inevitably one wonders whether a breakdown in our current pattern of cooperation could lead to a wider breakdown in the system itself. The collapse of trade in the 1930s, for which the seeds were sown in the late 1920s, was a landmark in trade history. The memory of that breakdown no doubt provided the impetus to create a more cooperative international economic system following the Second World War. What were the causes of that breakdown, and how 24

much are we at risk today of a similar disruption in the international trade system of the 1990s?

History The one hundred years prior to the 1930s reflected both liberalism and protectionism in the world trading system. In Britain, the pressure for a more general political reform led to the repeal in 1846 of the protectionist Corn Laws, followed by administrative measures that put free trade into practice. Free trade then spread to the Continent chiefly through the Cobden-Chevalier treaty of 1860, which in turn stimulated a series of trade-liberalizing agreements between various European nations. Thus, in Europe by the third quarter of the last century, it would be fair to say that Adam Smith's notion of an international economic system based on free exchange was as close to realization as it had ever been. But this flowering of liberalism did not endure. After 1870, an agricultural recession descended in Europe, owing in part to a shift in comparative advantage to the New World. At the same time, a slump occurred in industrial production which continued for over two decades in the form of low prices and low return on capital for manufactured products. 2 Protectionism then started as a straightforward response to hard times. AustriaHungary raised tariffs in 1876, followed quickly by Italy and Germany. France then responded to German protec2 The existence of this depression has been challenged in the literature; see for example S.B. Saul, The Myth of the Great Depression, 1873-1896. However, recent economic writing continues to characterize this period as an economic downturn: 'Taken as a whole, the years between 1872 and I 896 are usually referred to as the "Great Depression'" (Aaron L. Friedberg, The Weary Titan, 35).

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tionism with restrictions of its own. By the end of the century, Britain was the only major nation still practising free trade in the main. 3 In sum, the depression that began in the 1870s triggered a period of protectionism that never really turned around until after the Second World War. In the early part of this century, growing nationalism, and then war in 1914, exacerbated the protectionist trend that was already well established in response to the economic conditions of the late 1800s. And then again - as if humankind could not learn from only one lesson nationalism and war in 1939 continued that general trend until the middle of the twentieth century. There were several attempts to restore economic confidence and open up the trading system in the 1920s which occurred in the midst of more politically visible conferences on disarmament and the painful issue of German reparations. These conferences include the International Financial Conference at Brussels in 1920, the Genoa Conference of 1922, a conference on customs formalities in 1923, and the World Economic Conference of 1927.4 As one might expect, the early conferences sought to restore the pre-war level of trade, which was claimed to have fallen by half its volume following the war. The initial emphasis - which was true also of Second World War reconstruction - was to re-establish a payment mechanism, for without monetary exchange trade was impossible. Less attention was given to trade barriers as such. 3 For a fascinating account of comparative national responses to this depression, see C.P. Kindleberger, 'Group Behaviour and International Trade.' 4 Andrew Shonfield, ' International Economic Relations of the Western World: An Overall View,' 45

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Production returned fairly quickly following the war. Stocks which had been exhausted during the war were, if anything, over-abundant by the end of 1920. According to Swiss economist William Rappard, industries lacked markets, not raw materials: 'What was missing was not equipment, nor produce, but confidence, credit, purchasing power and trade. There was indeed every appearance of over-production in a starving world. ' 5 In an effort to address these problems, some thirty-five nations concluded an agreement at the 1923 customs conference to accomplish the modest objective of reducing the excessive and arbitrary formalities associated with national tariff policies. This conference did not attack protectionist tariff policies themselves, but it paved the way for the Geneva Convention on Import and Export Prohibition and Restriction of 1927, which was a product of the World Economic Conference of the same year. It was the most ambitious attempt to promote international cooperation on trade prior to the GATT in 1947. There are interesting analogies between the 1927 conference and the GATI Uruguay Round some six decades later. For one thing, economic conditions, although not buoyant, were not seriously depressed, and in fact the period 1923 to 1927 reflected a steady improvement in economic performance. 6 Then, as now, agriculture proved to be a difficult problem, and it was not dealt with in the 1927 convention. For the rest, however, the convention represented an imaginative attempt to pro5 Post-War Efforts for Freer Trade, 17 6 A. Loveday, 'World Economic Conditions,' 13-14. See also Shonfield: 'Western Europe's industrial production had struggled back to the pre1914 level by the middle of the 1920s and world trade had entered into its first sustained postwar boom' (45).

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mote a more liberal and stable trading regime. The convention banned 'prohibitions' on exports and imports, which were particularly destabilizing and likely to provoke retaliation. 7 It also created a common set of rules to discipline the use of quantitative restrictions; QRs, one should note, are still a major problem in contemporary GATT negotiations. The convention did not deal with all trade restrictions, for it did nothing about the already high level of tariffs. But in the context of the times, it represented a solid effort to instil confidence in a multilateral form of international trade management. Moreover, it was drafted with considerable political acumen, in a manner designed to avoid the most sensitive commercial interests in the leading trading nations. It was agreed the convention would come into force when eighteen nations had signed it. A number of nations - including the most important European traders signed it immediately, but the number fell short and the time-limit was extended in 1928 and then again in 1929. Two signatures were needed, which were expected to be provided by Poland and Czechoslovakia. In the event, the opportunity was missed. The Poles, who were the target of new trade restrictions that were imposed early in 1930, refused to sign. The Czechs then withdrew their acceptance. Other nations then followed suit, in what could be seen as a classic unravelling of multilateral cooperation, which is the worst-case scenario for any negotiator who has ever sought to forge an international agreement. By year-end, the convention was dead. 8 One obviously cannot rerun history to inquire what 7 Abolition of Import and Export Prohibitions and Restriction, League of Nations Publications, Economic and Financial (C.E.I. 22) (Geneva 1927), 15 8 Shonfield, 'International Economic Relations,' 44-6

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might have happened had the convention succeeded, or if the major nations, such as Britain, France, and Germany, had simply put it into effect on their own. True enough, the event did occur during the onset of the Great Depression; and true enough, the United States was not part of the scheme. The convention might have made no difference. But then again - at the darkest economic hour - a successful convention might have demonstrated the value of international cooperation, and thereby forestalled the prospect that nations would take self-serving actions in the international economy that would worsen the depression they collectively faced in their national economies. We do, of course, know what followed. In 1930, the United States passed the Smoot-Hawley tariff which raised U.S. duties to historic levels. The Smoot-Hawley Act was not a dramatic turnabout in trade policy, since the United States and other nations already had high tariffs at that time. Instead, it represented a new step in the long progression that nations had followed in closing their borders to foreign imports. Even more alarming than the substance of the Smoot-Hawley Act itself was the process by which it was created. The act was written in congressional committees that were unable to master the detail that had become part of major tariff legislation. Because of this complexity, and because of the general sympathy toward protectionism created by the depression, Congress essentially extended protection to all those groups that demanded it. The spectacle created was that of a gross excess of the democratic process, and a loss of control over trade policy by both the U.S. president and the congressional leadership. 9 9 E.E. Schattschneider, Politics, Pressures and the Tariff

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The Smoot-Hawley process had been watched closely by other governments, and they moved quickly to retaliate. As Secretary of State Cordell Hull recalled in his memoirs: 'when I came into the State Department I found in the files no fewer than thirty-four formal and emphatic diplomatic protests presented by as many nations, following the passage of the Smoot-Hawley high tariff Act. Nor had their protests been confined to words ... they retaliated in kind.' 10 Following the Smoot-Hawley tariff, Great Britain ended its historic policy of free trade in 1931 and in 1932 negotiated the Ottawa agreements which resulted in a tariff preference area in the British Commonwealth. These actions - in a very brief period - turned the major trading nation away from free trade and toward an acceptance of protection and bilateral bargaining. The competitive, protectionist actions of the United States, Great Britain, and other trading nations completed the breakdown of the international trade system by the mid- l 930s. Estimates vary on measuring the height of tariff barriers, but there is no denying that tariffs were raised abruptly by all countries in 1930-1, and in some case as much as threefold. The impact on trade was crushing, and world trade declined over the years 1929-34 by some 66 per cent. It took a generation to repair the damage. War and nationalism Any explanation of the breakdown of the 1930s necessarily focuses on nationalism and war. Although they are different, both these phenomena stimulate the natural tendency of states in an anarchic environment to 10 Memoirs, 355

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act in a self-interested manner. War, an extreme form of nationalistic behaviour, can be taken up first. Economists have great difficulty in sorting out the consequences of the war of 19J4. 11 There were many variables and they all affected on each other in a tangled confusion of relationships. There were shortages in some areas, and overproduction in others. Trade restrictions led to controls on payments, which further reduced the exchange of real goods; unemployment led to credit policies which strained the balance of payments, and in turn led to trade, and exchange controls. It is difficult to establish a causal order among all these variables, and economists have not done it with unanimity. What can be said is that the war simply broke up an imperfect but workable equilibrium between internal economic policies, trade, and payments that had existed under the gold standard of the nineteenth century. As was noted in the Proceedings of the World Economic Conference of 1927, 'The eight years of post-war experience have demonstrated the outstanding fact that ... the dislocation caused by the war was immensely more serious than the actual destruction. The main trouble now is neither any material shortage in the resources of nature nor any inadequacy in man's power to exploit them. It is all in one form or another a maladjustment ... The main obstacles to economic revival have been the hindrances opposed to the free flow of labour, capital and goods.' 12 11 See, generally, Charles P. Kindleberger, The World in Depression 19291939. 12 M.G. Theunis, 'General Survey and Summary,' League of Nations, Report and Proceedings of the World Economic Conferences of May 4-23, 1927, in I: 16. See also Peter Temin, who states: 'The origins of the Great Depression lie in the disruptions of the First World War.' Temin's argu-

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Thus, the effects of a past war greatly encumbered economic performance in the 1920s, and made the system less resilient. But war planning also played an important role in the European mentality after 1919. In the realm of economic policy, war planning took the form of mercantilism, and later a bilateralism inspired by Germany but copied by many others. 13 Both mercantilism and bilateralism were designed to place the interests of the nation ahead of the wider community, and they inevitably took their toll on the economic performance of the overall system. The practice of both mercantilism and bilateralism, like war itself, was an expression of nationalism in economic policy. Nationalism, as noted in chapter 1, is inherent in trade policy. While it is often derided in our age of internationalism, economic nationalism can have an elevating quality to its appeal. Consider for example the writings of the German economic philosopher Frederich List. Reality for List was the nation, for, in his words, 'between the individual and the whole human race there is the nation' ... [and] 'human civilization can only be conceived as possible by means of the civilization and development of nations.' 14 List felt that only in the bosom of the nation could the anomic individual acquire intellectual culture, productive power, security, and well-being. ment is that the depression was caused by inappropriate deflationary policies in Western governments, in tum stimulated by the shock of the First World War. See Lessons from the Great Depression, Lionel Robbins Lectures for 1989 (Cambridge, MA: MIT Press 1989), I. 13 Albert 0 . Hirschman, National Power and the Structure of Foreign Trade ; see esp. 'German Trading Methods under National Socialism,' 34-9. 14 National System of Political Economy, 263

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List's philosophy led to a policy of protectionism and industrialization to promote national development. Both the philosophy and policy are at variance with the classical school of trade economies, which proceeds from the simple Ricardian notion that the world would be economically better off if people were allowed to produce what they make most efficiently and trade freely to receive the rest. There is a certain force to List's arguments, not the least because he was right about the continued importance of nations in the international system, and because his theories describe the development of Germany and the United States through most of their existence. Furthermore, most developing countries have pursued policies that are consistent with List's philosophy, a phenomenon which may now be starting to change, owing in part to the challenges and opportunities presented by the Uruguay Round. If war and the excesses of nationalism played a role in the breakdown of the 1930s, how vulnerable are we today to these same phenomena? A balanced response would suggest that the system is much more resilient today, simply because modem weapons have made war between major powers an utterly unlikely event. We have outlived the effects of the past great war, and we know we could not survive another. Hence war planning and the mercantile behaviour it stimulates are unlikely to trouble our future as much as they did our past. This enormously reduces the risk of breakdown of the system. And what of economic nationalism: could it precipitate a breakdown? There is no doubt that nationalism will continue to test the liberalism of the system in the future. The problem in short is that nationalism in economic affairs inevitably becomes protectionist, and those 33

who are committed protectionists inevitably use nationalism to gain material ends. The use of nationalistic policies and protectionism usually carries a risk of retaliation, and then counter-retaliation. Then, too, the competition that ensues when nations employ nationalistic economic policies is potentially unrestrained. When firms compete - as they are encouraged to do - the tools of competition are limited; but when nations compete, they have a much wider arsenal to deploy. The result is that use of nationalistic policies in the trade system will always present some threat to system stability. Although a repetition of the breakdown of the 1930s may appear remote, it cannot be entirely discounted. Special interests A second factor in the breakdown of the 1930s was the pressure of special interests on democratic governments. Trade policy - as is true of many government policies - involves a balancing of the general interest against special claims. When the balancing fails, there are serious consequences for stability in both domestic governments and the international system. As Professor Bhagwati has noted, economists have long been frustrated by the discrepancy between the irrefutable logic of the benefits of free trade in theory, and the persistence of protectionism in practice. 15 The reason for this discrepancy was neatly explained some time ago by Vilfredo Pareto, who observed that individuals will work much harder to achieve a large gain than they will to avert a small loss. He then reasoned that 'a protectionist measure provides large benefits to a small number of people, and causes a very great number of 15 Protectionism, 72

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consumers a small loss, [which] makes it easier to put a protection measure into practice.' 16 This simple rule has been the basis for the existence of special-interest protectionism ever since the establishment of democratic government. Any democrat would recognize that special interests play an inevitable and legitimate role in trade politics. They could not be removed from the body politic without threatening the liberty of democratic government. The real issue for trade policy is how insistently special interests are able to press their demands; and even more important, how vulnerable the political system is to those demands. The Smoot-Hawley Act of 1930 represented a case where conditions maximized the power of groups seeking trade protection. For one thing, protectionism was the norm of government policy, and the crisis in agriculture in the late 1920s prompted government to search for the means to interfere with the market system. Second, as Schattschneider noted in his classic analysis of the Smoot-Hawley tariff, the groups were well organized, they possessed relevant information and knew what they wanted, and they held power in the wider economic community outside the formal organization of government. Third, the groups were assertive and well led, and as Schattschneider observed in a prescient remark that could easily apply to some modem lobbyists, 'the distinction between business and politics ... tends to vanish. Some businesses are highly political; and some businessmen are occupied with politics so continuously that they are substantially politicians.' 17 But active groups are only one side of the coin; vul16 Manual of Political Economy, 379 17 Politics, Pressures and the Tariff, 213

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nerable government is the other. The Smoot-Hawley tariff was written in Congress, and Congress, which has the constitutional power to regulate foreign commerce, was nevertheless a weak body in the face of concerted pressure from its constituents. The complexity of the tariff bill overwhelmed Congress, and the expertise of witnesses from the business community went beyond the knowledge of the average congressmen. Then, too, Congress is organized along lines which make it susceptible (even by design) to constituency pressures. 'One of the consequences of the system of separation of power,' said Schattschneider, 'has been to give the individual member of Congress an unprecedented initiative in legislation and to relax party discipline in Congress. The system has in this way given an unusual opening to pressures upon the members.' 18 The result, then, was foreordained. As Schattschneider concluded simply: 'protective duties have accordingly been given to nearly all who desire them.' 19 Thus, constituency pressure and governmental response were important factors in the breakdown of the 1930s. How vulnerable is the United States (or other nations) to these factors in the 1990s? At the outset, it is clear that domestic systems still contain formidable pressures, which are vividly demonstrated by the activities of textile lobbyists in America or farm organizations in the European Community. But despite the pressures these groups are capable of mounting, governments have since the 1930s learned coping techniques that allow them to retain a capacity for judgment and action in the face of demands for policy decisions. In the United States, for example, the process of cop18 Ibid., 291-2 19 Ibid., 283-4

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ing with constituency pressures began with the Reciprocal Trade Agreements Act (RTAA) of 1934. 20 This act effectively transferred tariff-setting policy from Congress to the Administration, which was better organized and had better expertise to deal with the technicalities of tariffs. Much later, when non-tariff measures were taken up in the Tokyo Round negotiation, Congress established a series of constituency groups (known as Sector Advisory Committees, or SACs) drawn from the private sector to provide advice to govemment. 21 The original intent of this scheme was to provide channels of access for business to government, and Congress implemented the scheme to ensure that trade bureaucrats in the Administration served the interests of constituents who in tum brought pressure on Congress. But what was forgotten in this scheme is that channels of access can be two-way streets, and bureaucrats used the SACS to shape, modify, and ultimately manage the pressures of which they themselves were the targets. 22 The SACS facilitated the control of constituency pressures through active, interventionist, and even aggressive communications. Other countries, particularly Canada, adopted similar principles that underlay the SAC system, although the format was tailored to meet the unique pressures found in each system. 23 20 See Carl Kreider, ' Democratic Processes in the Trade Agreements Program.' 21 The RTAA provided for a series of working groups to examine specific reciprocal agreements, but these groups were interdepartmental and not drawn from the private sector. See Henry J. Tasca, The Reciprocal Trade Policy of the United States: A Study in Trade Philosophy, esp. chap. 4. 22 See Gilben R. Winham, International Trade and the Tokyo Round Negotiation, chap. 8. 23 See Alan N. Rugman and Andrew Anderson, 'Business and Trade Policy: The Structure of Canada's New Private Sector Advisory System.'

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The result is that governments today are better prepared to deal with internal . pressures on trade policy than they were in the 1930s. Those pressure are not diminished, but they must be assessed in relation to the capacity of government to accommodate and manage them. Today, governments are more experienced and therefore stronger; and while this does not mean they will get their way in trade policy, it probably does mean the trade system is less likely to suffer a repetition of the loss of government control that was represented in the Smoot-Hawley tariff of 1930. Values and attitudes

A third factor in the breakdown of the 1930s was the values and attitudes that people held toward foreign trade. Protectionism was the norm in the world of the early twentieth century: it needed neither explanation nor apology, and it granted no concession. In that era, protectionism had been the norm in the living memory of most citizens of the world, with the exception of the British. It is common for economists to base their analyses on real economic variables, but the most thoughtful among them recognize the importance that political and even philosophical values have for their discipline. Such is the case with Smith and Keynes, and also with Hayek, who stated: 'whether we want it or not, the decisive factors which will determine ... evolution will always be highly abstract and often unconsciously held ideas about what is right and proper, and not particular purposes or concrete desires. It is not so much what men consciously aim at, as their opinions about permissible methods, which determine not only what will be done but also

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whether anyone will have the power of doing it.' 24 In the early decades of this century, the arguments for protection were aggressive, expansionist, and nationalistic. The evidence, from the United States at least, can be found in the language with which constituents framed their support for the Smoot-Hawley tariff. From this language one can discern which values predominated in the policy process. Schattschneider, for example, noted that public testimony before Congress rarely dissented from the principle of protectionism, and that 'many of the most passionate avowals of faith in the dogma of the protective tariff to be found anywhere in the record were made in the course of arguments against particular increases in the rate structure.' 25 In other words, the opposition to protectionism was reduced to the position of arguing against tariff increases as an exception to a generally assumed policy of protection. Arguments of this type took a familiar and standardized form, as in the example of one Peter Fletcher, who began his argument against higher duties on flax with the following disclaimer: 'The protectionist principle itself is not questioned, but ... ' 26 The Great Depression of the 1930s was a profound shock to the world, and it drove home the conviction that something was dreadfully wrong with the way nations had made international economic policy. As part of this conviction, the public's assessment of protectionism changed. Again the proof can be seen from the language of trade politics. Writing about trade policy in the mid-1950s, the analysts Bauer, Pool, and Dexter state: 'It has become relatively rare for a protectionist 24 F.A. Hayek, Law, legislation and Liberty, vol. I, Rules and Order, 69 25 Politics, Pressures and the Tariff, 141 26 Ibid., 143

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spokesman to argue for protectionism in principle. More often than not one hears the advocate of protectionism begin his statement as follows: "Of course I am for increasing trade and believe in lowering barriers, but ..." ' 27 Just to confirm the observation of Bauer and his associates, one can note a published letter from the 1970s of union president Douglas A. Fraser, which begins as follows: 'The UA w still believes that expanded trade can be beneficial to the American people both as workers and consumers. But .. .' 28 The change in language reveals that the tables had been turned, and that by the mid-1950s the liberal trade position had assumed the position of ideological orthodoxy. The impact of this philosophical change on public policy cannot be measured, but one assumes, with Hayek, that the impact would be substantial. The issue turns on which policy - protectionism or liberalism - is presumed to be right in principle, and which is to be applied in the absence of specific evidence to the contrary. In law, this would be a matter of which side has the burden of proof. Since in trade policy there is rarely unassailable evidence for any proposition that might be advanced at the public level, we can assume that decision-making will often tend to produce policies that are in line with the predominant values. What, then, is the contemporary philosophy toward international trade? In the 1990s, world attitudes toward trade continue in the main to be liberal. Most governments generally support free trade and reject protectionism in principle, even though for reasons of expediency they might be willing to tolerate substantial exceptions 27 America Business and Public Policy, 147 28 Ibid.

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in practice. This public philosophy of liberalism is a safeguard for the world trade system, and in the last analysis it is probably the most important protection we have against a recurrence of the breakdown of the 1930s. But the liberal philosophy cannot be taken for granted, for it is ultimately based on performance. Just as the philosophy of protectionism which it replaced was defeated because of its performance in the 1930s, so also will the philosophy of liberalism be judged by its ability to provide humankind with a workable and acceptable international economic system. Thus, when governments in the current GATI negotiation are unable to agree on the joint management of the world trade system, they are not only risking the collapse of the system in the short run, but in the longer run they are also putting at risk public confidence in the philosophy of liberalism, which is ultimately the only real foundation of the present system.

Conclusion This chapter has observed that the causes of the breakdown of the trade system in the 1930s lay with war and nationalism, the role of special interests, and the climate of values. Now indeed, there were many factors at work in the troubles of the 1930s, and it should come as no surprise that a political scientist would focus on essentially political variables. This analysis has not dealt with economic variables, in part because economists themselves have never agreed on the causes of the Great Depression, and particularly on whether those causes were principally real or monetary in origin, or whether they flowed mainly from the international or domestic systems. Another reason to focus on political factors is the 41

belief that even though economic factors may be more important to us in the long run, political factors have greater influence in motivating the behaviour of humankind. Certainly anyone who saw how quickly a minor war in the Persian Gulf pushed the Uruguay Round out of public consciousness could appreciate that fact. The argument of this chapter is that the world trade system of the 1990s is less vulnerable to breakdown than was that of the 1930s. It is an indication of how far we have progressed as a world economic community that the problem today is probably not so much how to avoid a complete breakdown of the system, but rather how international cooperation can promote stability and help us to maximize the economic potential of our various societies. By stability is meant the capacity of the system to avoid sudden (especially policy-induced) fluctuations, to maintain equilibrium, and therefore to promote predictability and certainty in trading relations. Were the system to lose stability, it could reduce the effectiveness of, and even endanger, the GA TI itself. The next chapter will examine the GA TI regime, which is a formal and organized pattern of cooperation that evolved from the occasional and less structured trade agreements that preceded it.

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CHAPTER THREE

Modem Trade Agreements: The GATT Regime The efforts to conclude agreements in international trade have been continuous throughout history. By the midtwentieth century, there were many elements of cooperation that existed in largely bilateral agreements negotiated in the interwar period. Following the Second World War, these elements were brought together into a multilateral contract known as the General Agreement on Tariffs and Trade, or GATI. The GATI contract is an agreement in itself, as well as an institutional manifestation of the trade-agreements process. Its role is to provide structure for that process. The GA TI takes the form of a multilateral international organization, but as an institution it has always been a curious hybrid. It was created mainly as a set of trading rules pending the completion of the ill-fated International Trade Organization (ITO), and it was put in place to accompany multilateral tariff-reduction negotiations that were held in 1948. The reason for the trading rules was simply to head off the possibility that nations would tum to other forms of protectionism as they reduced tariffs through multilateral negotiations. 1 The I John H. Jackson, World Trade and the Law of GAIT, esp. chap. 2

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was not created to be an international organization. Indeed, the fact that the modern-day GATI looks and functions like an international organization is the result of a largely unplanned and incremental accretion of political and legal powers. It has been institutionbuilding by accident. The GATI thus stands in stark contrast to most other international organizations. In comparison with the United Nations Security Council, for example, the GATT puts emphasis on process over structure, on policy rather than institution, and on pragmatism at the expense of idealism. The Security Council was organized to promote collective security, which was to be brought into being through an elaborate institutional structure based on great-power cooperation. However, great power cooperation was always more of an ideal than a practical reality, and the failure of that cooperation to materialize effectively stalemated the structure of collective security set out in the United Nations Charter. The GAIT, however, was organized to promote trade liberalism, which was to be put into practice through negotiations based on non-discrimination (that is, mostfavoured-nation treatment) and reciprocity. Both nondiscrimination and reciprocity were practical principles that had been incorporated into trade treaties prior to the Second World War, and they therefore provided a durable foundation for postwar trade liberalization. Unlike the postwar Security Council, the GA TI was a successful experiment in international cooperation. Since 1947, the level of tariff protectionism in industrial nations has fallen dramatically, and world trade has grown rapidly - and faster than world income. 2

GA TI

2 For example, Bhagwati notes that tariff levels in the early 1980s were at 4.6 per cent in the United States, Japan, and the European Community.

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The GATT constitutes a 'regime' in international relations, a term originally used in international law and now widely employed in political science. By common consent, 'regime' usually refers to principles, norms, rules, or decision-making procedures which shape expectations in a given area of international relations.3 This definition clearly applies to the GATT, and indeed the GATT is one of the most firmly established examples of regime in international relations, even though the actual behaviour of GATT contracting parties often falls short of expected behaviour. 4 What are the principles, norms, rules, and decision-making procedures of the GATT? Or, in brief, how does the GATT work? Given that the GATT is a well-established regime in international relations, how do its central features compare to the functions that are normally attributed to democratic government?

Constituting principles and norms of GATT The constituting principles of any regime should be viewed in relation to the environment in which the regime was created. Some regimes evolved over a long period through customary practice, but others are created in a brief period in response to a perceived crisis. The GATT was of the latter variety. Just as the U.S. Constitution was born in the context of a failed attempt For the United States, this represented a drop of about 92 per cent from 1947. See Protectionism, 3-4. 3 See Stephen Krasner, 'Structural Causes and Regime Consequences: Regimes as Intervening Variables,' 1-21. 4 For another application of regime terminology to the GAIT, see Jock Finlayson and Mark Zacher, 'The GAIT and the Regulation of Trade Barriers: Regime Dynamics and Functions,' International Organization 35 (198 I), 561--002.

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to establish collective government under the Articles of Confederation, so also the GA TI was established after a breakdown in the international system caused by economic depression and war. The events faced by the framers of the U.S. Constitution led to a concern for strong and effecfrve federal government, and similarly, past events led the creators of the GA TI to seek a more effective basis on which to conduct mutually beneficial trade relations. Like the U.S. Constitution, the GATI was intended to be a departure from past practice. Although it borrowed amply from past bilateral trade agreements, the multilateral regime it established was the basis of the new trade system.5 What were the principles established in the GATI? First was the aforementioned principle of non-discrimination, which was contained in the Article I requirement that any advantage granted to another contracting party would be immediately accorded to all other contracting parties. This requirement attacked the practice of bilateral tariff preferences, which were commonly employed for political reasons prior to the Second World War, and which compartmentalized and therefore reduced the flow of trade between nations. Another aspect of non-discrimination was found in Article III, which obliged nations to treat foreign products - once they had been imported and dutied - no less favourably than domestic 5 Another analogy to the U.S. Constitution can be found in the fact the GAIT, like the Constitution, contained an operational philosophy. The

operational philosophy of the Constitution was separation of powers, and the u .s. Government was established on this basis. The operational philosophy of the GAIT was to encourage nations to eliminate quantitative restrictions and other non-tariff measures in favour of tariffs, and then to eliminate tariffs progressively through multilateral negotiations based on reciprocity . The GAIT has conducted its affairs since 1947 on the basis of this philosophy.

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products in respect to taxes and other requirements. In general, Article I insured a country could not discriminate externally, and Article III insured it could not discriminate internally. The principles of external and internal non-discrimination were not easy to establish in international trade. For example, in the 1930s Article I non-discrimination, or most-favoured-nation treatment, would have required the United States to give any country (even Nazi Germany) that did not discriminate against U.S. trade the same tariff preferences it might have negotiated with any single country. This principle had the effect of elevating economics over politics in international relations, and it was the subject of vigorous internal debates in the Roosevelt administration. 6 Similarly, Article III non-discrimination was also difficult for nations to accept because it removed a whole range of policy tools (such as internal taxes or distribution requirements) that governments traditionally used to extend preferential treatment to domestic products. The importance of external and internal non-discrimination can be seen in the continuing relevance they have for the international trade system. Article I remains the cornerstone of the GATI, and even though it has been compromised by preferential free trade agreements, nations negotiating those agreements have been careful to ensure that preference arrangements did not introduce new protectionism into the broader system. 7 As for 6 E.g., see Hull's discussion of a proposed cotton barter deal with Nazi Germany: Memoirs, 370-4. 7 It should be noted that preferential free-trade agreements (including customs unions) are permitted by the GAIT, as long as they meet the requirements of GATI Article XXIV. The Canada-u.s. Free Trade Agreement complied with this legal requirement.

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Article III, its relevance is demonstrated by the frequency with which it is tested in GAIT dispute-settlement panels. For example, in the 1988 case on Canadian Liquor Board practices, the panel found that discriminatory mark-up and listing practices by Canadian provincial liquor boards were inconsistent with Canada's obligations to its trading partners under Article III. 8 This decision created pressure for reform of the Canadian practices. A second constituting principle of the GAIT is the prohibition in Article XI against quantitative and other non-tariff restrictions to trade. To be sure, this prohibition is qualified, but those qualifications have weakened over time in contrast to the stark requirement of Article XI that 'no restrictions other than duties' shall be maintained on the importation of any product. Today, the relevance of Article XI is subject to interpretation. On the one hand, its obligations are so severe that governments under serious internal pressures to protect certain industries have simply gone outside the GAIT to negotiate 'voluntary export restraints,' or VERs. On the other hand, for trade conducted under GA TI rules, Article XI is increasingly regarded by GATT lawyers as a key constraint on governments. For example, confrontation between trade and environment concerns is a major issue today, and Article XI obligations are the crux of this debate, as was illustrated in a 1991 GA TI panel decision on tuna. At issue was environmental legislation in the United States which prevented the sale of tuna caught by methods that also kill dolphins, which served as the rationale for a ban on imports of tuna from 8 GAIT, Panel on Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Boards, 5 February 1988

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Mexico. The GATI panel determined that the U.S. restrictions violated that nation's obligations to Mexico under Article XI. This issue is discussed further in chapter 5. A third principle deals with the methodology and values that were adopted by the GATI in reducing trade restrictions. The methodology was spelled out in Article XVIII, which states that negotiations 'on a reciprocal and mutually advantageous basis,' and 'directed to the substantial reduction of tariffs,' were important in carrying out an expansion of international trade. The notion of reciprocity is probably the most interesting aspect of this methodology. Reciprocity can be seen as a straightforward component of negotiation in general, and in the GATI's early history of trade negotiations reciprocity was a guiding beacon as nations began the process of dismantling tariff protectionism. However, reciprocity as a concept ran into difficulties when developing countries acceded to the GATI. Because it is questionable whether equal treatment of unequal partners in trade negotiations could be considered reciprocal, numerous exceptions from full reciprocity were granted by industrialized GATI partners in favour of developing countries. For example, the 'special and differential' provisions of the various Tokyo Round codes were an attempt to mitigate the obligations of code membership for developing countries. 9 In the end, the efforts to water down GATI reciprocity for developing countries have produced fairly little in concrete terms, and this demonstrates how difficult it is in international trade to depart from the notion of 'equal treatment under the law.' 9 The 'special and differential' formula provided exceptions for developing countries to the disciplines of the Tokyo Round codes.

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Another challenge to reciprocity comes from negotiations that are designed to remove protectionism entirely, such as that evidenced in the Canada-u.s. free-trade negotiation. Reciprocity has usually meant that a given amount of protection would be reduced in exchange for an equal amount of reduction by a trading partner. Over the years this concept has led to some finely calculated exchanges in international trade negotiations, but the concept and the practice make no sense if nations are ~eeking to liberalize their trade completely. For example, if Canada' s tariffs were twice those of the United States, would Canada have 'lost' twice as much as the United States if the two countries removed tariffs completely? The answer is that a concept of reciprocity, which in a narrow sense has served as a valuable mechanism to initiate trade liberalization, probably must give way to a fuller (and more economically rational) understanding of national economic interest for the process of liberalization to be completed. Two other constituting principles of the GATI are safeguards and the concept of 'commercial considerations.' First, safeguards. The operational plan of the GATI framers was that restrictive measures on trade would be reduced to tariff protection, and then tariffs would be reduced through multilateral negotiations. In a situation where tariff reductions created an insurmountable political problem in any contracting party, the GATI also allowed (in Article XIX) for nations to backtrack on their commitments (that is, to raise tariffs) for a period of time to pennit orderly adjustment of domestic markets. The intent was to ensure that problems in specific industries did not compromise the general process of liberalization. In the event, GATI contracting parties have not made much use of the safeguard clause 50

because of the requirement that safeguard actions be non-discriminatory and therefore not directed toward a limited number of countries. Instead, nations have used anti-dump procedures as a means of contingent protectionism, 10 or they have negotiated side agreements outside the GATI, such as individual VERs or the more generalized Multi-Fibre Arrangement that covers textile trade. While these actions weaken the GA TI, they also underscore the need for a safeguard mechanism. The fact that the GA TI has accommodated itself to these protectionist actions over the years has often been viewed positively as an example of pragmatism and resilience. The principle of 'commercial considerations,' or support for the values of the free market versus government interventionism, is implicit in the entire framework of the GATI. The term is mentioned specifically in Article XVII, where state-controlled enterprises are enjoined to act according to 'commercial considerations,' and is implicit in Article XVI, where the harmful effect of subsidies on efficient production is mentioned. The principle also underlies the norm of non-discrimination, especially the obligations in Article m:4 to treat products in a non-discriminatory manner. Because the GATI represents commercial, free-market values, it has been a popular organization in a world that has recently moved in the same direction, and that continues to move in that direction with the dissolution of international communism. 11 IO Contingent protectionism, as defined by Rodney Grey, is protection on a specific product and/or from a specific country ('protectionism when and where you need it'). The term is intended to refer to a range of escape clause actions and trade remedy actions, such as countervail and antidumping duties. For further discussion, see Rodney Grey, 'A Note on U.S. Trade Practices,' 243-57. 11 An indicator of the GATT's popularity is its apparent acceptance by