FDR's Comprehensive Approach to Freer Trade

Oct 13, 2011David B. Woolner

Encouraging free trade was one part of the Roosevelt administration's broader effort to revive the global economy and create good jobs for all Americans.

The recent activity in the U.S. Senate on trade -- including the passage of three long-awaited trade bills on Wednesday and the passage of the Currency Exchange Rate Oversight Reform Act on Tuesday -- has revived a longstanding economic debate between the advocates of freer trade versus those who favor protectionism. Not surprisingly, with the United States suffering its worst economic crisis since the Great Depression and with unemployment still hovering at 9 percent, an increasing number of Democrats and Republicans, especially those representing manufacturing states, have come out in favor of protectionism. The fact that the passage of the three trade agreements -- with South Korea, Columbia, and Panama -- was linked to an extension of the Trade Adjustment Assistance program (a 50-year-old measure designed to provide assistance to workers displaced by foreign trade agreements) is but one indication of the increasingly protectionist mood in Congress.

A far more significant indication of the strength of protectionist sentiment can be seen in the broad bipartisan support for Tuesday's legislation aimed at punishing China for currency manipulation. Both Republican Senator Jeff Sessions and Democratic Senator Chuck Schumer, for example, have emerged as key champions of the bill. But other Republicans and Democrats have expressed strong reservations about the measure, noting that one possible outcome of the bill might be a trade war with China. In a recent editorial in the Wall Street Journal, Senator Robert Corker even went so far as to liken the bill with the passage of the 1930 Smoot-Hawley Tariff, which he argued resulted in a "deeper depression and a decade of increased joblessness."

Corker's reference to damage wrought by Smoot-Hawley is accurate. The passage of Smoot-Hawley did indeed touch off strong counter-measures among our trading partners, leading to the establishment -- among other things -- of the 1932 British system of Imperial Preference, which allowed goods within the British Empire to be traded with little or no tariff restriction, locking out American goods and commodities and in the process weakening the U.S. economy. What is missing from Senator Corker's warning is any reference to the tremendous effort that emerged during the Roosevelt administration to do away with protectionism; an effort that would ultimately not only break down the Smoot-Hawley Tariff, but which would also pave the way for the creation of the multilateral global economy we live in today.

The driving force behind this effort was FDR's Secretary of State, Cordell Hull, who considered the passage of Smoot-Hawley an unmitigated disaster. Hull had been arguing in favor of freer trade for decades, both as a Democratic congressman and later senator from Tennessee. Given the long-standing protectionist tendencies of Congress -- which reached their zenith with the passage of Smoot-Hawley, the highest tariff in U.S. history -- Hull faced an uphill struggle to accomplish this task. He also had to overcome FDR's initial reluctance to embrace his ideas, as the president preferred the policies of the "economic nationalists" within his administration during his first year in office. By 1934, however, FDR's attitude began to change, and in March of that year the president threw his support behind Hull's proposed Reciprocal Trade Agreements Act -- a landmark piece of legislation that fundamentally altered the way in which the United States carried out foreign economic policy.

Convinced that the country was not ready for a truly multilateral approach to freer trade, Hull's legislation sought to establish a system of bilateral agreements through which the United States would seek reciprocal reductions in the duties imposed on specific commodities with other interested governments. These reductions would then be generalized by the application of the most-favored-nation principle, with the result that the reduction accorded to a commodity from one country would then be accorded to the same commodity when imported from other countries. Well aware of the lingering resistance to tariff reduction that remained in Congress, Hull insisted that the power to make these agreements must rest with the president alone, without the necessity of submitting them to the Senate for approval. Under the act, the president would be granted the power to decrease or increase existing rates by as much as 50 percent in return for reciprocal trade concessions granted by the other country.

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The 1934 Act granted the president this authority for three years, but it was renewed in 1937 and 1940, and over the course of this period the United States negotiated 22 reciprocal trade agreements. Of these, the two most consequential were the agreements with Canada, signed in 1935, and Great Britain, signed in 1938, in part because they signaled a move away from Imperial Preference and hence protectionism, and in part because they were regarded as indicative of growing solidarity among the Atlantic powers on the eve of the Second World War. It is also important to note that Hull, like many of his contemporaries, including FDR, regarded protectionism as antithetical to the average worker -- first, because in Hull's view high tariffs shifted the burden of financing the government from the rich to the poor, and secondly, because Hull believed that high tariffs concentrated wealth in the hands of the industrial elite, who, as a consequence, wielded an undue or even corrupting influence in Washington. As such, both FDR and Hull saw the opening up of the world's economy as a positive measure that would help alleviate global poverty, improve the lives of workers, reduce tensions among nations, and help usher in a new age of peace and prosperity. Indeed, by the time the U.S. entered the war, this conviction had intensified to the point where the two men concluded that the root cause of the war was economic depravity.

Inspired by this sentiment, Congress renewed the RTAA again in 1943 and 1945. The U.S. would also champion the 1944 Bretton Woods Accords, which set up the International Monetary Fund and World Bank, and after the war, Hull's RTAA would go on to serve as the model for the negotiation of the 1947 General Agreement on Tariff and Trade (GATT), the critical institution upon which the modern global economy stands and the precursor to the World Trade Organization (WTO) established in 1995. Hence, it was U.S. reciprocal trade policy -- a policy that had changed little since its inception during the New Deal -- combined with a newfound determination to play a leading role in world affairs, that guided U.S. policymakers in the mid-1940s towards a new post-war international economic order -- an economic order still largely in operation to this day.

Of course, it is important to remember that the Roosevelt administration's efforts to expand world trade were accompanied by such critical pieces of legislation as the National Labor Relations Act and Fair Labor Standards Act, which vastly strengthened the place of unions in American life. The 1930s and '40s were also years in which the government engaged in an unprecedented level of investment in America's infrastructure and industry -- largely through deficit spending -- that helped vastly expand our manufacturing base and render the United States the most powerful industrialized country in the world. Our efforts to expand trade and do away with protection were only part of a broader effort to reform the U.S. economy in such a way as to provide what FDR liked to call "economic security" for every American.

This comprehensive approach, though not always pretty and sometimes contradictory, was nevertheless based on the simple principle that it is a fundamental responsibility of government -- even a liberal capitalist government -- to ensure that the free market is managed in such a way as to produce the greatest good for the greatest number of people, not the other way around. With 16 million Americans under- or unemployed, one would think that any moves to endorse freer international trade would be accompanied by an even stronger effort to create jobs here at home, but based on the Senate's recent rejection of President Obama's jobs bill, it seems highly unlikely that this will be the case.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute. He is currently writing a book on U.S.-UK economic relations in the 1930s, entitled Cordell Hull, Anthony Eden and the Search for Anglo-American Cooperation, 1933-1938.

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