Reciprocal Tariff Act

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The Reciprocal Tariff Act (enacted June 12, 1934, ch. 474, 48 Stat. 943, 19 U.S.C. § 1351) provided for the negotiation of tariff agreements between the United States and separate nations, particularly Latin American countries.[1] The Act served as an institutional reform intended to authorize the president to negotiate with foreign nations to reduce tariffs in return for reciprocal reductions in tariffs in the United States. It resulted in a reduction of duties.

Reciprocal Tariff Act of 1934[edit]

President Franklin Delano Roosevelt signed the Reciprocal Trade Agreements Act (RTAA) into law in 1934. RTAA gave the president power to negotiate bilateral, reciprocal trade agreements with other countries. This law enabled Roosevelt to liberalize American trade policy around the globe. It is widely credited with ushering in the era of liberal trade policy that persists to this day.[2]

Tariffs in the United States were at historically high levels from the post-Civil War period through the 1920s. In response to the Great Depression, Congress accelerated its protectionist policies, culminating in the Smoot-Hawley Act of 1930. The Smoot-Hawley Act was a smorgasbord of high tariffs across many American industries. At the same time, countries in Europe enacted protectionist policies. Many economists believe that these policies worsened the Depression. The RTAA marked a sharp departure from the era of protectionism in the United States. American duties on foreign products declined from an average of 46% in 1934 to 12% by 1962.[3]

How the RTAA was different from other trade agreements[edit]

Before the RTAA, if Congress wanted to establish a lower tariff for particular imports, it would act unilaterally, taking the foreign country’s tariff rate as fixed. Congress would choose a tariff rate that was either a little higher or lower than the median preferred tariff, depending upon the composition of the Congress. Generally, a Republican controlled Congress would prefer higher tariffs and a Democrat controlled Congress would prefer lower tariffs. Thus, tariffs were chosen based on the domestic politics of the United States. Individual members of Congress were under great pressure from industry lobbyists to raise tariffs to protect them from the negative effects of foreign imports.[3]

The RTAA’s novel approach freed Roosevelt and Congress to break this trend of tariff increases. First, it tied tariff reductions by the United States to reciprocal tariff reductions with international partners. It also allowed Congress to approve the tariffs with a simple majority, as opposed to the requisite two-thirds majority necessary for other treaties. Lastly, the president had the authority to negotiate the terms. These three innovations in trade policy created the political will and feasibility to enact a more liberal American trade policy.[3]

Reciprocity was an important tenet of the trade agreements brokered under RTAA because it gave Congress more of an incentive to lower tariffs. As more foreign countries entered into bilateral tariff reduction deals with the United States, American exporters had more incentive to lobby Congress for even lower tariffs across many industries.[3]

By giving the President the authority to negotiate these deals, the Congress effectively ceded a part of their power (authorized under US Constitution, Article I, Section VIII) to the executive branch. The President had to consider the aggregate welfare of all Americans, his foreign policy priorities, and what was feasible with other countries in making his decisions on tariffs. These considerations generally left presidents more inclined to reduce tariffs than the Congress.[4] Whether Roosevelt or Congress foresaw this result is a matter of historical debate.

The historical partisan divide over tariffs and the RTAA[edit]

After the Civil War, Democrats were generally the party of trade liberalization, while Republicans were generally for higher tariffs. This pattern was clear in congressional votes for tariffs from 1860 until 1930. Democrats were the congressional minority in the majority of Congresses between the Civil War and the election of Roosevelt. During their brief stints in the majority, Democrats passed several tariff reduction bills. Examples include the Wilson-Gorman Act of 1894 and the Underwood Tariff Act of 1913. However, subsequent Republican majorities always undid these unilateral tariff reductions.[2]

By the Great Depression, tariffs were at historic highs. Members of Congress commonly entered in informal quid pro quo agreements where they voted for other members’ preferred tariffs in order to secure support for their own. At no point did anyone take into account the aggregate toll on American consumers or exporters. This practice is commonly referred to as logrolling. President Roosevelt and key members of his administration were intent on stopping this practice.[4]

Though Democrats voted for trade liberalization far more often than Republicans, they were not uniform in their preferences. Democrats skeptical of reducing tariffs during the Depression included Representative Henry Rainey (D-IL) and members of Roosevelt’s own administration – Rexford Tugwell, Raymond Moley and Adolf Berle. However, the administration decided to take advantage of having a Democratic-controlled Congress and Presidency to push through the RTAA. In 1936 and 1940, the Republican Party ran on a platform of repealing the tariff reductions secured under the RTAA. But when they won back Congress in 1946, they did not act to remove the tariffs. In the years since the enactment of the RTAA in 1934, the economies of Europe and East Asia had been decimated by the violence of World War II. This left a huge global production vacuum that was filled by American exporters.[2] In the World War II period, the United States had its highest positive account balance in its history. Republican preferences for tariffs started shifting as exporters from their home districts began to benefit from increased international trade. By the 1950s, there was no statistically significant difference between Republicans and Democrats on tariff policies. This change has endured to the present day.[3]

The durability of the RTAA[edit]

Another key feature of the RTAA was the fact that if Congress wanted to repeal a tariff reduction, it would take a two-thirds supermajority. That means that the tariff would have to be especially onerous and that the Congress would have to be especially protectionist. Once enacted, tariff reductions tended to stick.[3]

As more American industries began to benefit from tariff reductions, some of them began to lobby Congress for lower tariffs. Prior to RTAA, Congress was mostly lobbied by industries seeking to create or increase tariffs to protect their industry. This change also helped to lock in many of the gains in trade liberalization. In short, the political incentive to raise tariffs decreased while the political incentive to lower tariffs increased.[3]

How RTAA changed the world[edit]

As American duties dropped off dramatically, global markets also increasingly liberalized. World trade expanded at a rapid pace. The RTAA, though a law of the United States, provided the first widespread system of guidelines for bilateral trade agreements. The United States and the European nations began avoiding beggar thy neighbour policies (which pursued national trade objectives at the expense of other nations). Instead, countries started to realize the gains from trade cooperation.

Led by the United States and the United Kingdom, international cooperation flourished and concrete institutions were created. In talks begun at the Bretton Woods Conference of 1944, the International Monetary Fund was created. By 1949, the first international board governing trade, the General Agreement on Tariffs and Trade (GATT) was established. In 1994, GATT was replaced with the World Trade Organization (WTO), which oversees international trade agreements today.[5][6]

The US State Department also found good use of the expansion of free trade after World War II. Many in the State Department saw multilateral trade agreements as a way to engage the world in accordance with the Marshall Plan and the Monroe Doctrine. US trade policy became an integral part of US foreign policy. This pursuit of free-trade-cum-diplomacy intensified during the Cold War, as the United States competed with the USSR for relationships around the globe.[5]

Notes[edit]

  1. ^ "The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade." Michael Bailey, Judith Goldstein, and Barry Weingast. World Politics, Volume 49, No. 3, 1997."
  2. ^ a b c Hiscox, Michael J. (Autumn 1999). "The Magic Bullet? The RTAA, Institutional Reform, and Trade Liberalization". International Organization 53 (4): 669–698. doi:10.1162/002081899551039. 
  3. ^ a b c d e f g Bailey, Michael A.; Goldstein, Weingast (April 1997). "The Institutional Roots of American Trade Policy". World Politics (49): 309–338. 
  4. ^ a b Alt, James E.; Gilligan, Michael (1994). "The Political Economy of Trading States: Factor Specificity, Collective Action Problems and Domestic Political Institutions". The Journal of Political Philosophy 2 (2): 165–192. 
  5. ^ a b Oatley, Thomas (2010). International Political Economy. pp. 71–113. 
  6. ^ Ruggie, John Gerard (Spring 1982). "International regimes, transactions, and change: embedded liberalism in the postwar economic order". International Organization. 2 36: 379–415.