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Reluctant Partners: a History of Multilateral Trade Cooperation, 1850-2000
By Andrew G. Brown University of Michigan Press
Copyright © 2003 Andrew G. Brown
All right reserved. ISBN: 0472113054
1 What Shapes National Trade Policy In the private enterprise economies of the world, the great driving force behind an expansive trade policy is and always has been the commercial search for access to foreign markets and sources of supply. It has forever been counterbalanced by hardly less powerful commercial interests--those of the domestic producers and workers who have to face competition from imported supplies. The balance of interest between groups influenced by these opposing forces has never been static. It is in endless flux as groups on both sides respond to economic growth and change at home and abroad. Trade policy, however, is not simply the outcome of the tug-of-war between these groups. Nations and the political elites or parties who govern them have other aims besides satisfying the wishes of commercial interests. Everywhere, national security takes precedence over commercial interest. For the more powerful nations, trade policy has often been a vehicle used in achieving the political aims of foreign policy. Most recently, many citizens in Western countries now push for the use of trade policy to advance human rights or to enforce environmental or labor standards.
Besides such political concerns, trade policy is profoundly influenced by prevailing ideas about what constitutes the national economic interest. The ascendant ideas and beliefs are usually consistent with the dominant commercial interests; but the intellectual rationale that they provide for national policies also has to be more broadly acceptable. Further, both current ideas and interests work within an established framework of domestic laws and institutions. Inherited from the past, the framework embodies other ideas and interests that are usually not easily dismissed.
SEARCHING FOR MARKETS: THE COMMERCIAL INTEREST Throughout history, the primary commercial driving force behind the trade policies of countries has been the search by their traders and entrepreneurs for access to foreign markets and sources of supply. Both the trade merchants of medieval times and the heads of large corporations today have been assiduous in seeking the help of their princes or governments in gaining easier access to foreign markets and sources of supply. In generations past, one course of action often resorted to by the more powerful states was the use of force or the threat of force to create colonial empires or "spheres of influence" that assured their traders or manufacturers access, often on an exclusive basis. Indeed, such use of force was elevated by the Marxist-Leninists into a general explanation for the trade of the capitalist "imperialist" powers. As Stalin put it, with his usual bluntness, "countries which consider themselves inadequately provided with raw materials and export markets try usually to change the position in their favor by means of armed force" (quoted in Kissinger 1994, 440). While such an explanation of trade relations may seem mildly ludicrous to most of us today, ample support can be found for it in the history of earlier centuries, and many people in developing countries now subscribe to this imperialist interpretation. But even in the nineteenth century or earlier, it failed lamentably to provide an explanation for the evident and vigorous growth of trade among countries that were in no sense threatened by each other. In relations among states where military force was not a feasible or desirable means of gaining access to markets or supplies, the instruments that countries turned to were trade policy and trade diplomacy.
Industrial Development as the Driving Force The commercial search for access to foreign markets and sources of supply has greatly intensified over the last two centuries as industrialization has taken root and spread throughout the world. The endless advance in technology, organization, and skills that raises productivity and drives economic growth has given a powerful impetus to foreign trade. The long and continuing decline in transport and communication costs, aided in the nineteenth century by such transforming innovations as the railroad and the steamship and symbolized today by the advent of the Internet, has greatly lessened the natural barriers that distance imposes on trade. At the same time, the opportunities for specialization have been vastly enhanced as markets have grown and as the introduction of new products has diversified output.
Such dynamics have caused world trade to rise faster than world output over most of the decades since the onset of the modern industrial era (see table 1). The upward trend in the share of world output that is traded was broken only during the interwar years, when the economic dislocations of the 1920s were succeeded by the Great Depression of the 1930s. It was sometime after the Second World War before the share of trade recovered to the level it had attained at the end of the belle epoque, but the share of output that is traded as merchandise exports today is almost double what it was in 1913. (It stood at over 22 percent of gross domestic product in 1998--a measure that takes no account of trade in services, which could raise the share to as much as 28 percent.)
Since the early nineteenth century, the composition of merchandise trade has gradually shifted in favor of manufactures. After industrialization first took off in Britain, a significant part of international trade became an exchange of factory-made manufactures for primary commodities. In the later nineteenth century, as other countries industrialized, some measure of interindustry specialization appeared, and the exchange of manufactures for manufactures started to grow. Only after the Second World War, however, did the value of trade in manufactures begin to overshadow that of primary commodities.
The core of postwar trade has been the exchange of manufactures and semimanufactures among the industrially more established countries of North America, Western Europe, and Japan. It has increasingly taken the form of an exchange of products coming from within the same industries and differentiated only in quality, price, or design. In the last two or three decades, the extent of specialization in world trade has taken another large step, appearing at the level of component parts traded within individual firms. Innumerable corporations have outsourced part or even all of their production to their affiliates in other countries. Many firms have gone further: their production is now broken down among different facilities located in several countries, with the assembly of the final product taking place close to the markets of yet other countries. According to estimates by the United Nations Conference on Trade and Development (UNCTAD), perhaps roughly one-third of world trade in goods and services during 1993 consisted of intrafirm trade between multinationals and their affiliates.
When we look at the economic histories of most countries, it is evident that industrialization has been of underlying importance in bringing about shifts in national trade policies. Certainly, there is no simple and mechanical relation; as I will discuss later in this chapter, prevailing ideas about economic policy have also been influential in affecting the timing of the shift in policies. But a country's move toward greater trade cooperation has commonly occurred when manufactures have begun to account for a substantial share of its total exports.
There is a simple reason for this. As exporters of primary commodities, countries have generally faced low trade barriers. Certainly, this has generally been true for exporters of agricultural or mineral raw materials and of noncompeting foodstuffs; only for competing agricultural products have trade barriers been a major and persistent issue--especially in the latter part of the twentieth century. In manufactures, however, the case has been consistently different. As a consequence, governments wanting to satisfy their own manufacturing interests but faced with protectionist barriers abroad have been pressed into negotiating with other countries to gain access to the latter's markets.
The export history of the United States provides an instructive example. Total U.S. merchandise exports in 1969 actually comprised a smaller share of gross domestic product than was the case one hundred years earlier. Still, U.S. trade policy shifted dramatically over that period, from highly protectionist to relatively open. Matching this change was a rise in the share of manufactures in total U.S. exports (see table 2). Manufactures did not bulk larger than primary commodities in the United States until the interwar years, and as I shall discuss in chapter 4, a real change in attitude toward trade policy began to take place only then. A similar rise in the share of manufactures in total exports has been taking place over the last thirty years in a growing number of developing countries. As table 3 shows, manufactures now bulk large in the exports of a number of developing countries that have been industrializing fast. It is not surprising that the attitude of these countries toward trade cooperation has likewise been changing, as I will discuss in chapter 8.
In its later stages, industrialization has been accompanied by a search for foreign markets by service industries (paralleling the same search by manufacturing industries). While long present, this search by service industries gained a new impetus in the last quarter of the twentieth century, as broad economic policies within countries underwent significant changes. When countries began to deregulate and privatize major service industries, such as financial services or telecommunications, new opportunities for private capital opened up, and pressure for governments to gain access to foreign markets mounted. World trade in services consequently burgeoned, outpacing the growth of trade in manufactures. This has been of especial importance in altering the content of the most recent international trade negotiations, extending them beyond trade barriers to include domestic laws and regulations that govern the operation of enterprises in specific service industries.
Foreign investment has likewise been influential in affecting the commercial interest of countries in each other's markets. Significant in the era before the First World War, then falling away in the interwar years, it has undergone a great expansion over recent decades. Some of the motives behind the recent expansion have been the same as in postwar decades. Direct investment, especially in developing countries, has continued to be undertaken in order to gain market access by leapfrogging over trade barriers or in order to secure access to raw materials. Some direct investment has also taken advantage of the low wage costs in developing countries and has been linked to new opportunities for global specialization within firms in the production of specific manufactures. But the most notable thing about the recent expansion in foreign direct investment is that it has been dominated by investments within and among the industrially more established countries. The investments have been mainly undertaken not to overcome barriers that impede exports or to tap cheaper sources of supply for the home market but, more simply, to increase the sales of corporations and strengthen their competitive position in an increasingly unified market.
Competing Commercial Interests The commercial interests pushing for easier access to foreign markets have almost always had their counterpart at home in demands to restrict foreign access to the domestic market. The trade of individual countries is always a two-way process, and (unless there are large outflows of capital) an expanding export trade is inevitably matched by rising imports. In medieval and renaissance Europe, traders perhaps encountered little opposition at home to the merchandise that they brought from other countries, such as silks or spices from Asia, since these did not threaten to supplant domestic production. Likewise, all countries today import some products that are noncompeting since their production depends on natural advantages that the importing countries do not have; imports of petroleum or of tropical fruits by temperate climate countries are examples.
More generally, however, imports are in actual competition with domestic production or could potentially be replaced with domestic substitutes. So, in modern times, an endless internal conflict between those commercial interests threatened by imports and those oriented around exports has been the hallmark of trade policy. This has posed an insoluble dilemma for governments; in assisting their export industries to gain easier access to the markets of other countries, they have been confronted with demands from the other countries for comparable improvements in access to their own market, running counter to the interests of those at home who are threatened by imports.
The Endless Tug-of-War In any country, the composition of the conflicting commercial groups and the relative intensity of the pressures that they seek to exert on their government change ceaselessly over the years. Objective economic circumstances, both within the country and in the international economy, endlessly modify the composition and preferences of the two groups. Over the term of several decades, the most important source of internal economic change is economic growth itself; this creates structural changes that lead to the emergence of new export activities. Comparable unending changes also take place in the international economy. Long-term economic growth in other countries brings about global shifts in comparative advantage among individual industries and activities, and these shifts have inevitably had adverse effects on the older producers. One example is the shift to developing countries in comparative advantage in textiles and apparel that has taken place over the last twenty to thirty years. Another is the emergence in the 1870s of the regions of recent European settlement in the Americas and Oceania as huge, low-cost producers of temperate climate agricultural products.
Changing macroeconomic conditions over shorter periods, both at home and abroad, also affect export- and import-competing interests, altering the balance of opposing pressures that they bring to bear on their government. One destabilizing source can be fluctuating exchange rates. The kind of instability that beset the international monetary system in the 1920s or the large currency misalignments that have recurred since the early 1970s, for instance, repeatedly affected the balance of interests between exporting and import competing industries. A more general experience is the effect of recessions at home in intensifying protectionist sentiment; in prosperous times, politicians are more likely to shrug off the economic dislocations caused by foreign competition than in periods of recession or stagnation.
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Excerpted from Reluctant Partners: a History of Multilateral Trade Cooperation, 1850-2000 by Andrew G. Brown Copyright © 2003 by Andrew G. Brown. Excerpted by permission.
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