Splendid Exchange, A

by Bernstein, William L

  Its drafters sensed that they were actors on a unique historical stage—one on which everything around them was a shambles, and in which the fate of the entire world depended on just how they reassembled the pieces. As expressed in the opening sentence of Proposals, “The main prize of the victory of the United Nations is a limited and temporary power to establish the world we want to live in.”42

  Proposals went on to catalog the mistakes that had been made and to suggest how, in general, to avoid repeating them, and then, more specifically, how to negotiate the unraveling of the protectionism that had crippled international commerce since 1880. It was nothing more and nothing less than a road map for the new commercial Pax Americana. The economic historian Clair Wilcox, writing in 1948, neatly summarized America’s transformation from autarky to leader of the new international commercial order:

  [After the First World War] we made new loans to the rest of the world; now, again, we are making such loans. But then, we sought to recover, with interest, sums that we had advanced to our allies to finance the prosecution of the war. And, at the same time, we raised our tariff so fast and so far as to make it difficult, if not impossible, for any of these debts to be paid. Now, however, we have written off the wartime balance of the lend-lease account and we have taken the lead in reducing barriers to trade. We have come, at last, to recognize the requirements of our position as the world’s greatest creditor. We have demonstrated that we can learn from history.43

  The first order of business was to get the British on board. By 1945, the positions of England and the United States had completely reversed; heavily indebted Britain sought to choke off imports so as not to erode its scarce currency reserves, whereas the U.S. State Department wanted to open up world commerce as rapidly as possible. After tough negotiations, the victors reached a compromise: multilateral trade talks would proceed, but with all participants allowed an “escape clause” if they determined that lower tariffs might produce “sudden and widespread injury to the producers concerned.”

  The newly opened world trade was, at least initially, an American creature, an accident of the singular international economic conditions at the end of the war. With the United States the last man standing, American farmers, workers, and capitalists had relatively little to fear from foreign competition in any sphere. In the immediate postwar years, Americans of all stripes offered little resistance to lower tariffs.44

  In early 1947, trade officials from twenty-two major nations, using Proposals as their blueprint, paired off in Geneva in a dizzying round of more than a thousand bilateral conferences covering more than fifty thousand products. The negotiations yielded a document that became known as the General Agreement on Tariffs and Trade (GATT), signed by twenty-three nations (Pakistan having been born during the process) on November 18, 1947.

  Table 13-2. GATT Rounds

  Year

  Round/Event

  Action

  1947

  Geneva

  45,000 reductions in bilateral tariffs covering onefifth of world trade

  1949

  Annency, France

  5,000 reductions in bilateral tariffs

  1951

  Torquay, England

  8,700 reductions in bilateral tariffs, covering most of items not previously affected

  1955–1956

  Geneva

  $2.5 billion reduction in bilateral tariffs

  1960–1962

  Dillon Round

  $5 billion in bilateral tariff reductions; EEC talks begin

  1964–1967

  Kennedy Round

  $40 billion reduction in bilateral tariffs, negotiation rules established

  1973–1979

  Tokyo Round

  $300 billion reduction in bilateral tariffs, procedures on dispute resolution, dumping, licensing established

  1986–1993

  Uruguay Round

  Further tariff reductions, difficulties in rationalizing agricultural tariffs

  1995

  WTO Established

  WTO takes over GATT process

  2001–present

  Doha Round

  Talks stalled on North/South issues and agricultural subsidies

  Just three days later, fifty-six nations entered into negotiations in Havana for the formation of the International Trade Organization (ITO), which was to oversee succeeding GATT rounds. Curiously, the ITO died, a victim of indifference in the U.S. Congress and of the Republican victory in the congressional election of 1946, whereas GATT flourished.45 By the end of its third round in Torquay, England, in 1951, the prewar barriers to industrial products had been largely demolished. This fall is reflected in the levels of the United States’ import tariffs, plotted in Figure 13-2.

  Proposals’ anonymous authors had, perhaps unwittingly, cracked one of the central problems of free trade, which modern economists and sociologists refer to as the “logic of collective action.”46 Free trade provides modest benefits for most of the population while greatly harming small groups in specific industries and occupations. Imagine, for example, that the United States forbade the importation of foreign-grown rice. This would greatly enrich a few thousand domestic growers, as they would make millions, and most Americans would not notice the few extra dollars per year hidden in their grocery bills. Domestic growers, each of whom has a large stake in the issue, would resist any attempt to open the market up to foreign rice much more actively than the hundreds of millions of consumers who would each benefit a tiny amount each year from less expensive imported rice. The GATT, in essence, created a global “consumers’ union” representing the world’s billions of disenfranchised buyers, each nicked a few pennies, francs, or yen every time the cash register rang.

  Figure 13-2. U.S. Import Tariffs on Dutiable Goods Under GATT

  As a rough approximation, then, we can divide the history of modern globalization into four periods. The first period spans the years between 1830 and 1885, when rapidly falling transport and communication costs combined with relatively low tariffs (except in the United States) to dramatically increase the volume of trade and to produce global convergence of wages, land prices and rents, and interest rates. During the second period, roughly between 1885 and 1930, intense agricultural competition from the Americas, Australia, New Zealand, and the Ukraine caused a European protectionist backlash; this was easily overwhelmed by the continuing fall in transport prices.47 The third period, which began with the passage of Smoot-Hawley in 1930, saw slowing improvements in transport technology swamped by large tariff hikes. These events resulted in a devastating fall in world trade.48 During the fourth period, which began in 1945, the free-trade initiative led by the United States, as outlined in Proposals, opened the floodgates of world trade. The real value of world commerce exploded and grew at the astonishing rate of 6.4 percent per year over the next half century. Between 1945 and 1998, the volume of world trade increased from 5.5 percent of world GDP to 17.2 percent.

  Figure 13-3. Real Value of World Trade: 1720–2000 (Constant 1998 Dollars)

  The postwar increase in trade volume and the nearly simultaneous rise of longshoremen’s unions combined to make the journey from cargo hold to freight car (or, increasingly, diesel truck) nearly as expensive as the journey across the ocean. An exhaustive government study of the freight carried on one transatlantic voyage by one vessel, the SS Warrior found that more than one-third of the cost of getting its cargo to its final destination was incurred on the pier. For cargoes to and from Hawaii, the cost was closer to 50 percent.

  America’s founding fathers made few missteps in crafting the Constitution, but surely none did more harm than the five “extra” words in the famous Commerce Clause of Article I, which gave the federal government the power “to regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” The power to regulate commerce among the states eventually gave rise in 1887 to the Interstate Commerce Commission (ICC), which regulated nearly every aspe
ct of long-range transport in the United States, corroded nearly every industry it touched, and stifled American transport innovation until it was finally abolished in 1995.

  For more than a century, merchants had sought an “intermodal” shipping device that could be seamlessly loaded and unloaded among train, truck, and ship. In 1837 a shipper in Pittsburgh, James O’Connor, devised a boxcar that could be either fitted with train wheels or mounted on a canal barge, and in 1926 the Chicago North Shore and Milwaukee Railway began to “piggyback” trailers onto flatcars. The ICC decided that such intermodal devices fell under its authority and promptly brought their development to a halt.

  In the mid-1950s, two events revolutionized the technology. The first was the brainchild of a visionary trucking executive, Malcolm McLean: a prototype of the modern shipping container, specifically designed to stack inside a surplus military tanker, chosen because of its relatively rectangular hull. The second was a federal court ruling in 1956 that removed intermodal containers from the ICC’s purview.

  The widespread adoption of McLean’s new system saw port costs plummet over the next few decades. If international freight had been cheap before 1960, afterward it became practically free—in the unlovely jargon of economics, “frictionless.”49 Freed of burdensome tariffs and shipping costs, goods began circulating more freely around the globe. If shirts or cars could be produced ever so slightly cheaper in a given country, then their production would shift there.

  At the same time that shipping costs were shrinking almost to nothing, Europe was becoming rich. The Continent’s new wealth aligned European capitalists, now the owners of an abundant factor, with labor in favor of lower tariffs. As predicted by Stolper-Samuelson, Europeans embraced both free trade and democracy. Although the European Community supported its farmers with subsidies under the so-called Common Agricultural Policy, this did not prevent the decline of agriculture: in 1950, farmers made up 35 percent of the Continent’s workforce; in 1980, just 15 percent.

  The post-World War II period would see an even greater flip-flop in the trade policies of America’s major political parties. As the nation became increasingly prosperous and its capital became ever more abundant, the Republicans, the traditional party of capital, changed their allegiance from protectionism to free trade. (This switch occurred during the Eisenhower administration.) The Democrats, on the other hand, have traditionally represented the interests of laborers, the owners of a scarce factor, and farmers, the owners of an abundant factor. Over the course of the twentieth century, the relative size of the labor force grew while that of the farming population shrank; today, farmers constitute just 1 percent of the work force. As a result of this shift in their constituency, the Democrats swung toward protectionism, and in response, farmers defected en masse to the Republican Party.

  Ronald Rogowski provides a final, intriguing twist to Stolper-Samuelson; just as his paradigm suggests who favors or opposes free trade, it also suggests which groups see their power enhanced or diminished by their nation’s trade policy. The rise of protectionism in the 1930s empowered the owners of scarce factors both in the United States (labor, represented by the Democratic Party) and in Germany (land and capital, represented most ferociously by the Nazis). So too does the rise of free trade today empower those who favor it, most spectacularly the owners of America’s abundant factors—land and capital—represented by the Republican Party. Rogowski observed in 1987:

  As far as one can now foresee, the Democrats . . . will increasingly embrace protectionism and, much as Labor in Britain, will be reduced to a regional party of industrial decay. In the burgeoning and exportoriented West and South the Republicans will achieve something close to one-party domination.50

  Over the next twenty years, Rogowski’s prediction came increasingly true. Only very recently has protectionism again begun to gain traction in the heretofore solidly Republican West and South. How well the Republicans will maintain their dominance of these regions in the face of the Bush administration’s colossal mistakes in foreign policy remains to be seen.

  Although GATT dramatically altered the balance of power in the battle between protectionism and free trade, it did not succeed with all cargoes. Agriculture and textiles represent two of the world’s oldest and largest economic sectors. Over the centuries both sectors have acquired great expertise in politics and propaganda and have thereby managed to escape, at great cost to consumers, the rigors of the new global marketplace. In most countries, farmers have succeeded in portraying themselves as the “soul of the nation,” in spite of the fact that they constitute no more than a small percentage of the workforce in most developed countries.

  From the outset, the world’s farmers and textile manufacturers were able to exclude themselves from the GATT framework and maintain high tariffs and, even more importantly, non-tariff barriers such as quotas, restrictions, and subsidies on both domestic production and exports.

  The survival of protection for textiles and agricultural products has clearly cost the world’s developing nations dearly, as these are the two areas in which they have the greatest comparative advantages. Exactly how and why this occurred is a matter of some controversy. One interpretation is that GATT is yet one more mechanism of rationing crumbs from the white man’s table to the world’s poorest nations, crippling them in precisely those areas in which they are best able to compete. According to an alternative explanation, the world’s developing nations are hellbent on autarky and essentially indifferent to the GATT process, unwilling or unable to meet the developed nations halfway.

  The evidence favors the latter explanation. Developing nations typically levy agricultural import tariffs in excess of 50 percent (over 100 percent in India), as compared with 30 percent in Europe and 15 percent in the United States. Second, until very recently, many developing nations, led by India, openly espoused a policy of “import substitution”—the encouragement of a broad range of domestic industries with high tariffs. (Indian autarky is symbolized in its original national flag by Gandhi’s chakra, or spinning wheel. Just before independence, this was replaced, to Gandhi’s dismay, with the ashoka chakra, the wheel of law.) Finally, as will be seen in Chapter 14, the developing nations that opened themselves to international commerce have prospered mightily.51

  To see protectionism’s modern face, meet the Fanjuls. The heirs of wealthy Cuban sugar growers who fled the island after Fidel Castro’s victory in 1958, and one of Florida’s wealthiest families, these three brothers today own 160,000 acres of prime Florida cane fields, in addition to 240,000 acres in the Dominican Republic. The Labor Department has repeatedly singled out their holding company, Flo-Sun, for abuse and underpayment of workers, and the Department of the Interior extracted from them a huge settlement for toxic runoff from their fields into the Everglades.52

  One federal agency, however, takes a sunnier view of the Fanjuls: the Agriculture Department, which in recent years has paid them an average of $65 million annually for their sugar—more than twice the world price—as part of a broad system of agricultural supports costing taxpayers $8 billion per year.53 To the Fanjuls, this $65 million subsidy is just so much change left under the plate; the main event is quotas, which jack up grocery prices by keeping foreign crops out of the United States and in 1998 robbed American consumers of an estimated $2 billion for sugar alone.54 Not coincidentally, the Dominican Republic, home to huge Fanjul plantations, has the highest import quota among the world’s sugar-producing nations. Nor is this all: the Army Corps of Engineers spends an estimated $52 million per year keeping these sugar fields dry, damaging the environment yet more.55

  How did the Fanjuls and their peers manage to secure such government largess over the decades? By giving generously to various political campaigns in the form of both direct and “soft” money. One of the most fascinating passages in the independent counsel’s referral to the House’s impeachment proceedings against William Clinton related to his dalliance with Monica Lewinsky. The president demonstr
ated his famous talent for multitasking by combining these sessions with telephone conversations. On only one occasion did he ask his dedicated young aide to leave the room so that he could answer a call in private. The caller was neither the British prime minister nor the pope, but Alfonso (“Alfie”) Fanjul.56

  Since the inception of GATT, virtually all nations have sidestepped its best efforts to lower barriers to agricultural trade—the rich nations with non-tariff barriers (mainly subsidies) and the poor ones with direct tariffs.57 After the September 11 attacks, the United States and Europe convened the Doha Round of GATT talks under the auspices of the newly formed World Trade Organization (WTO)—the successor to the ITO. The Doha Round explicitly sought to end all subsidies by 2013 in order to alleviate poverty in the developing world, the breeding ground for international terrorism.

  Negotiations collapsed ignominiously in July 2006 in a hail of mutual recrimination. None of the three major parties to the talks—Americans, Europeans, and developing nations—could bring itself to offend its sacrosanct farmers. One observer noted that the failure of the Doha Round was a “big victory for the farm lobby groups,” and the Indian representative declared, “We can’t negotiate subsistence and livelihood . . . we should not even be asked to do that.” The European negotiator, Peter Mandelson, noted even more candidly before the talks that the Continent would lose “next to nothing” if the negotiations failed.58 There is one consolation: as the world has become a wealthier place, protected food and clothing constitute an ever smaller proportion of the global economy. (In 2006, for example, Americans spent less than 10 percent of their income on food, down from 24 percent in 1929.59)