Now, I don't want to give anyone the false impression that tariffs are out of control;
in fact, on average, tariffs on traded goods are lower than they were at any point in the
20th century.
Let me give you a little background first: in the 1920s, when Herbert Hoover was running
for office, he made a campaign promise to US farmers to protect them from foreign competition
if he was elected to office.
Once he was elected, he needed legislative support to get a bill moving through Congress.
Getting started wasn't so bad; legislators from farming states were more than happy to
sponsor such a bill -- but that wasn't enough votes to actually get it passed.
So what you do if you're seeking support for a farming protection bill from people who
care nothing about farming?
What if, for example, you're approaching a representative from Detroit?
How do you make the proposed bill more interesting?
Add a line or two about protecting the automakers, perhaps?
And so it went: a little something for car makers, furniture producers, textile manufacturers…
in the end, the Smoot-Hawley Bill entailed protection for over 20,000 US products.
Now, other countries in the world weren’t sitting idly by while Smoot-Hawley was making
its rounds; they were, to say the least, rather unhappy at the prospect of restrictions on
so many of their own products.
In an attempt to stop the US, other countries threatened to impose restrictions of their
own if Smoot-Hawley passed.
Some countries, like Canada, wrote their own protectionist legislation, while others simply
said that they would boycott US products.
Nonetheless, in 1929 the Smoot-Hawley Bill became law -- the first shot in global trade
war.
Between 1929 and 1932, the total volume of world trade fell from a total value of about
$3 billion to only $1 billion, making Smoot-Hawley one of the major contributing factors to the
Great Depression.
Europe was soon embroiled in World War II, with the US to follow.
After the war, countries around the world agreed that perhaps the trade brawl had been
a mistake that ought not to be repeated, and many of them sat down and formed an agreement,
to begin scaling back the tariff restrictions.
This was the birth of the General Agreement on Tariffs and Trade, or GATT.
At their highest, around 1930, the average level of tariffs on traded goods was at about
70%, nearly doubling the prices on imported goods.
With the first full round of GATT in 1947, tariffs were reduced to about 40%, and then
reduced further with each subsequent round.
By 1993, GATT was in its ninth round, the Uruguay Round, and tariffs were down to about
2 to 3% average on traded goods.
Here's the thing, though: just because governments have agreed to cut tariffs, does this mean
that the weak domestic industries stop wanting protection?
No!
So if you sign an agreement that says your country won’t use tariffs, does this necessarily
mean that no protection will be used?
No; in fact, with the decline in tariffs came an increase in quotas.
So then GATT began to address quotas.
With the decline in quotas came increase in the use of voluntary export restraints (VERs),
or other nontariff barriers (NTBs), like health and safety restrictions.
Take a look at the duration of each round.
Do you notice that each round gets longer and longer?
That's because 1) it gets harder and harder to ”trim the fat,” 2) the most contentious
products -- usually agriculture -- kept getting put on the back burner, and 3) the Uruguay
Round was the first to try to deal with the trade restrictions placed on services.
Back when GATT started, it was dealing only with hard goods, like cars and refrigerators;
trade in financial services, technical consulting, and the like, didn't appear until later.
It took the better part of nine years to complete the Uruguay Round, and when it was done, not
only were there reductions in protection, but also the old GATT was gone.
It evolved into the World Trade Organization, or WTO.
The WTO is meant to serve as a place for trade dispute mediation.
If one country has a complaint about another country’s trade policies, that complaint
can be heard by the WTO.
Here's an interesting tidbit from The Economist magazine: as of 2009, the US was the single
most challenged country, i.e. the country that has had the most complaints lodged against
it for unfair trade policies.
However, we are also the single largest complaining nation.
The US has lodged more complaints against other countries than any other single nation.
Keep these facts in mind for WTO discussion that we’ll be having in our next face-to-face
class.
NEXT TIME: Trade blocs TRANSCRIPT00EPISODE 37: GATT/WTO