A Return to Bilateral Agreements: an End to the Nondiscriminatory Multilateral Trading System?

• Jurisdiction: United States,Federal
• Citation: Vol. 46 No. 3
• Publication year: 2018

A RETURN TO BILATERAL AGREEMENTS: AN END TO THE NONDISCRIMINATORY MULTILATERAL TRADING SYSTEM?

C. Donald Johnson^*

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Table of Contents

I. Introduction...............................................................................692

II. Cordell Hull and the Struggle to Create the Multilateral System................................................................693

III. The Trump Trade Doctrine.......................................................705

IV. LIGHT HIZER AND THE WTO...........................................................708

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I. Introduction

In one of the first executive orders signed after his inauguration, President Donald J. Trump directed the Office of United States Trade Representative (USTR) to withdraw the United States as a signatory to the Trans-Pacific Strategic Economic Partnership Agreement (TPP) reached with eleven Pacific nations during the Obama administration and to "permanently" withdraw from any further TPP negotiations. President Trump expressly declared in this document that it was the intention of his administration "to deal directly with individual countries on a one-on-one (or bilateral) basis in negotiating future trade deals."¹ He further directed USTR to begin pursuing "bilateral trade negotiations to promote American industry, protect American workers, and raise American wages."²

The President's background in private business traces a path of real estate deals exhibiting his approach to most decision making. It is often said that he has a "transactional" rather than a strategic perspective. He has the reputation of a shrewd businessman who makes decisions quickly—some say impulsively—based on his assessment of the transaction at hand, viewing his goals in every deal as a zero-sum game. One side wins and the other side necessarily loses. Generally, the businessman's goals are narrowly focused on maximizing monetary profit for immediate or long-term gain. Within the bounds of fiduciary responsibilities and legal and ethical rules, this focus is appropriate to satisfy shareholders, business partners, and personal needs. Every tool, from economic dominance to filing bankruptcy, can be employed to gain leverage for winning or preserving profit. In a private trade transaction, it is understandable that the businessperson may be able to bring greater leverage in a one-on-one, bilateral transaction negotiating with a party with fewer resources, rather than try to reach agreement with multiple parties with diverse interests and potentially enhanced leverage with combined resources.

In the political economy of the post-World War II era, however, the United States has been the principal architect of the nondiscriminatory multilateral trading system in an effort to promote and sustain economic stability among scores of state actors with economies engaged in rules-based, free market trade. A critical question immediately comes to mind from the Trump administration's decision to terminate multilateral trade agreements and direct USTR to focus engagement on bilateral, country-by-country trade

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agreements: Is this the beginning of the end of the rules-based liberal economic order created in the post-war years to settle disputes and reduce discriminatory trade barriers through a multilateral trading system?

II. Cordell Hull and the Struggle to Create the Multilateral System

Most of the free world has lived under the economic stability of the predominantly nondiscriminatory trading system of the multilateral General Agreement on Tariffs and Trade (GATT) initiated in 1948, which has continued under the World Trade Organization (WTO) since 1995. This system was constructed on the ruins not only of two world wars, but the trade wars of the interwar years and the Great Depression. When Franklin D. Roosevelt defeated President Herbert Hoover in the 1932 election, at the onset of the Depression, he selected as his Secretary of State Senator Cordell Hull (D-TN), who led the long struggle to create this system. Hull, as a congressman in 1916, had begun calling for an "international trade congress" to be formed among all commercial nations to promote peace through fair trade and the avoidance of trade warfare.³

An ardent life-long proponent of free trade, Hull led the opposition on the Ways and Means Committee against the infamous Smoot-Hawley Tariff Act of 1930 that brought U.S. protective tariff levels to nearly the highest levels in history and provoked retaliatory trade measures against American exports in an already depressed world economy.⁴ In an era when the United States had the largest, but also the most protected, market in the world and other nations engaged in trade wars or traded on mercantilist principles of bilateral barter, Secretary of State Hull began slowly to bring tariffs down and transform the trading system one country at a time using broad authority granted by the Reciprocal Trade Agreements Act (RTAA) of 1934.

Hull waged the struggle to create this system against both domestic and foreign opposition forces. Unlike the battles Hull had waged against protectionist Republicans in Congress—who had fiercely protected domestic manufacturers against imports since the Civil War—his trade opponents were often found within his own party. Although President Roosevelt supported a more liberal trade program, Hull was forced into internecine

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combat with some of the New Deal insiders of the Roosevelt administration who saw Hull's trade idealism as a distraction, at best, from their domestic programs addressing unemployment. The New Dealers' solutions were focused on increasing domestic purchasing power, and trade promotion policy was not among those solutions. Generally viewed as economic nationalists, the New Deal planners were not enamored by free trade philosophy, and, in fact, they feared that a focus on tariff reform might be at cross purposes with their own domestic recovery plans. In the second year of the Roosevelt Administration, however, Hull overcame most of the New Deal opposition to his trade program when FDR enthusiastically proposed and easily passed the RTAA through Congress.⁵

Nevertheless, a major new internal problem developed after Roosevelt appointed George N. Peek in December 1933 to be his special assistant on foreign trade. Much of the trade policy debate throughout 1934 and 1935 was dominated by the conflict between Hull's internationalist approach and Peek's nationalistic perspective. Peek was a former farm implement manufacturer who had been vice president of John Deere and Company and president of the Moline Plow Company. A firm believer in maintaining a favorable balance of trade through export subsidies and dumping surplus agriculture products in foreign markets, Peek had been trying to implement his trade beliefs as head of the Agriculture Adjustment Administration (AAA) even before becoming FDR's foreign trade assistant in the White House. At the AAA, he came into direct conflict with Secretary of Agriculture Henry A. Wallace and Undersecretary Rex Tugwell. Wallace had become one of Hull's allies on trade. Wallace's influential pamphlet, America Must Choose, supporting the RTAA, had even attracted the endorsement of Henry L. Stimson, Hoover's Secretary of State.⁶ Tugwell, one of the original members of Roosevelt's Brain Trust and a New Deal economist, was no friend to Hull's laissez-faire trade policies, which Tugwell considered anachronistic, but he strongly opposed Peek's export dumping proposals because he was attempting to raise farm prices and reduce surplus agriculture through domestic production controls. Tugwell advised Wallace that dumping American farm exports would only provoke retaliation.

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Roosevelt often chose subordinates with conflicting views so that he could play one against the other and be free to make his own decisions. The President's selection of Peek, first perhaps to counterbalance Wallace and then to spar with Hull, suited his decision-making process. George Peek saw in his new job in the White House an opportunity to take over trade policy coordination and to neutralize Hull's liberal trade goals. While Hull was out of the country, Peek submitted a plan to the President for reorganization of the administration's trade policy apparatus which put him at the helm. Opposition to Peek's plan came naturally from the State Department, and Wallace joined Commerce Secretary Daniel C. Roper in weighing in on Hull's side against Peek's proposal. Roosevelt ultimately confirmed that Hull and the State Department would be in charge of RTAA trade negotiations, but not before he further entrenched Peek as a problem for Hull by naming him head of the newly created Office of the Special Adviser on Foreign Trade. Further, the President endowed Peek's office with a huge budget for statistical analysis and appointed him president of the newly established Export-Import Bank of Washington (Exim Bank). The Exim Bank was created initially to finance export sales to the Soviet Union and Cuba, but Peek immediately began to use it to pursue his own trade program, which ran diametrically counter to Hull's efforts.

For Hull, a critical aspect of the trade program was the requirement he had imposed that agreements under the RTAA be negotiated under the unconditional "most-favored-nation" (MFN) principle—that is, on a nondiscriminatory basis with all trading partners that did not discriminate against the United States. This requirement allowed Hull to multilateralize the tariff reductions obtained in bilateral agreements. Simply stated, it worked as follows: If in bilateral negotiations with country X, the United States agreed to reduce tariffs on a particular product, it committed also to grant this tariff reduction on the same product from all other countries that maintained nondiscriminatory tariffs on imports from the United States. Likewise, if country X later reduced the tariff on a product for a third...