U.S. Trade Policy and Changing Domestic and Foreign Priorities: A Historical Overview

CRS Report for Congress
Received through the CRS W eb
U.S. Trade Policy and Changing Domestic and
Foreign Priorities: A Historical Overview
Specialist i n International T r ade and Finance
Foreign Affairs, Defense, and T r ade Division
U . S . t r ade policy i nvolves actions that influence t he flow and composition o f
goods, s ervices, and investments. Resting at t he intersection o f domestic and foreign
p o l i cy, trade policy s eeks t o p romote both domestic and foreign policy objec t i v e s ,
economic as well as political . Viewed i n historical perspective, foreign policy priorities
have dominated U.S. tr ad e policy decisions over l ong periods of time; conversely,
domestic policy p riorit i e s h a v e h e l d s way i n o ther eras. In t oday’s post 9 /11 world,
foreign policy a n d national s ecurity priorities m ay be gaining i ncreas ed prominence,
although m any i nterest groups and M embers of Congress can be ex pected to push t he
Bush Administration also t o s upport polic i e s t hat m ore d irectly benefit domestic
economic and political interests. This report will be updated as events warrant.
Uni que As pects of U. S . Tr a de Pol i c y
U.S. trade policy i nvolves government measures that affect the d irection a n d
composition of imports, ex ports, and investments across borders. These interventions
can take the form o f t ariffs, quotas, and subsidies, which s erve as distortions to trade. Or
they can take the form of negotiations that seek to free up t rade and i nvestment flows.
Trade policies p rovide a m eans for achieving important domestic and foreign policy
obj ect i v es. Vi rt u al l y every m aj or forei gn t rade deci si on affect s bot h dom est i c and forei gn
economic and political interests. Thes e i nteres ts may be des cribed as follows:
! Domestic political i n t e r e sts i nvolve responsiveness o f d emocratic
institutions and l eaders t o o rganized interest groups which m ay seek t o
achieve a b road array o f political, s ocial, and economic outcomes t hrough
trade policy d ecisions.
! Domestic economic i n t erest s ent ai l t he effect s o f t rade pol i cy d eci s i o n s
on the overall domestic economy i n t erms of GNP growth, i nflation, and
em ployment, as wel l as on t he health and vitality of speci fic r egi ons,
industries, workers, and communities t hat m ay have divergent, i f n o t
competing, interests;

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! Foreign economic interests i nvolve the s upport o f a rules-based and non-
discriminat ory open world trade s ys tem t hat over time promotes gl obal
prosperity and s tability b u t in the s hort-run m ay be costly to maintain;
! Foreign political interests entail t he pursuit of foreign policy and
national s ecurity go als i ncluding alliances with friendly countries, which
can be solidified by t rade policies.
Due l argel y t o changi ng i n t ernal and ex t ernal fact ors, t h ere h as been a l ong hi st ory
where the general thrust of U.S. trade policy has vascillated from emphasizing either
domestic or foreign policy goals. A division of U.S. trade history into five broad eras —

1765-1815, 1815-1934, 1934-1962, 1962- 2001, and post 9 / 1 1 — i l l ustrates this point.

W h ile the boundary lines between these p eriods are s omewhat arbitrary, and ex ceptions
to the general characteriz ation o f each period c a n b e f o und, ex aminations of them in a
trade contex t can prove illustrative. 1
Trade policy i n t he fir s t p eriod (1765-1820) aimed p redominantly at establishing
nationhood and s overeignty, which are major foreign policy objecti v e s . In t he second
period (1815-1934) the m ain o rientation o f t rade policy was on the s ale o f U.S. p roducts
abroad and p rotection o f U.S. i ndustry, primary domestic objectives. In t he third p eriod
(1934-1962), t rade policy em p h a s i z ed creating a non-discriminatory and open world
trading s ys tem as well as o ther foreign po licy objectives. In t he fourth period (1962-
2001), t rade policy tilted i ncreasingl y t owards achieving domestic economic objectives
such as protect i ng U.S. workers and firms from fai r and unfai r import competition and
providing U.S. ex porters with equal opportunities t o s ell i n foreign markets. Propelled b y
the concerns of the fight against t e r r o r i s m , a new post 9 /11 t rade policy era may b e
developing where U.S. priorities again tilt back towards forei gn p o l i cy and national
security concerns. A brief s ummary of thes e eras and trends follows.
1765 -1820: I ndependence a nd Nati onhood
Trade policy played an important role in promoting both i ndependence and full
recognition of t he United S tates as a sovereign nation. The i nitial use of trade as an
instrument to achieve foreign policy objectives began when t he colonist s b o yc o t t ed
British goods to protest t he British-imposed tax es imposed by the S tamp Act o f 1765 and
Townsend Acts of 1767. Massachusetts acted first t o boycott most British goods and
other colonies soon followed. By cutting British ex po r t s t o t he colonies in half, t he
boycott helped persuade the British government to rescind t he tax es.
In the first half of the 1770s, t he colonists again used boycotts of British goods as a
response t o import duties imposed on tea. King George III refused t o budge o n t h e tax
despite pleas from m erchants, fighting ensued i n 1775, and t he colonies eventually won
their i ndependence i n p art over an i ssue o f t rade policy and who s hould d etermine it.2

1 Richard N. Cooper, “T rade Policy as Foreign Policy,” In Stern, Robert M, U.S. Trade Policies
in a Changing World Economy, MIT Press, 1989, p. 292.
2 Richard N. Cooper, “T rade Policy a s Foreign Policy,” pp. 293-294.

Trade policy continued t o b e u sed o r p ropos ed as a m eans t o achieve foreign policy
obj ect i v es duri n g t he nex t several d ecades aft er i ndependence. Boycot t s , p art i al o r t ot al ,
of British goods were used or advocated to support post-revolutionary France in its
s t ruggl e with Engl and i n 1789 and again in 1810 agai nst Britain and France to induce
them to lift t heir blockades against neutral s hips.
1815-1934: Promoting E xports and Restricting I mports
Over the n ex t hundred years, U.S. trade policy was d r i v en almost ex clusively b y
domes tic economic and political interests. Thes e i ncluded using higher tariffs to protect
infant U.S. industries from European competitors and ex p anding U.S. ex ports. In pursuit
of the l at t e r objective, a m ai n orientation of U.S. foreign policy was to open u p foreign
markets f o r U . S. ex ports. U.S. actions to open u p J apan in the 1850s, and support for
the “open door” policy i n C hina in the l ater part of the 1 9th Century can be viewed in large
part as efforts t o ex p and m arkets for U.S. ex ports.
The t rend towards h igher average tariff levels during t his p eriod can be ex plained b y
two factors. The first wa s a f i s c a l consideration t hat t ariff collections accounted for a
sign ificant p roportion (as high as 40 percent) of total federal revenues. (The income tax
was not enacted until 1918). The second was due to the responsiveness o f l awmakers to
demands from i ndustrialists for p rotection from import competition. Absent a t heo r y
about the d amage p rotection could yield, a s well as absence of concern about the impact
of U.S. trade barriers on U.S. forei gn interests, protection from forei gn competition during
this period was considered a right to which all interests were entitled, not an ex ception t o
established policy.3
The n i n et eent h cent u ry pat t ern of t reat i n g t ari ffs as a dom est i c pol i cy i ssue, however,
was s haken i n 1930 as a result o f t he passage of the S moot-Hawley Tariff Act. S etting t he
average U.S. t ariff at an all-time high of over 55 percent, the act contributed to the world
depression and p recipitated retaliation from U.S. t rade partners. By 1932, U.S. ex ports
an d imports had plunged by nearly 70 percent. The res ults ultimately contributed to a
major s hift away from a preoccupation with domes tic economic and political
considerations in the m aking of U.S. t rade policy. 4
1934-1962: Domi nance of For ei gn Economi c Obj ecti ves
In response t o t he deleterious consequences of the S moot-Hawley t ariff and heavy
lobbying b y S ecretary o f S tate Cordell Hull, Congress in 1934 pa s s e d t he Reciprocal
Trade Agreem ent s Act (R T AA). Under t hi s t hree page law, Congress del e ga t e d t o t he
ex ecutive b ranch authority to enact reductions of up to 50 percent i n U.S. t ariffs provided
that foreign countries reciprocated i n t u r n . T he RTAA not only created a n ew
congressional-ex ecutive b ranch relationship for making trade policy, it al so established
a n ew philosophical framew o rk. This approach rested on the notion t hat (1) U.S.

3 Cohen, Stephen D., J oel Paul, a nd Robert Blecker, Fundamentals of U.S. Foreign Trade Policy,
Westview Press, 1996, pp. 27-31.
4 Schwab, Susan C. Tr ade-Offs: Negotiating t he Omnibus Tr ade and Competitiveness Act ,
Harvard Business School Press, 1994, p. pp.21-22.

prosperi t y depe n d ed on access t o forei gn m arket s, not on t ari ff prot ect i on; and (2) t h at
i n creased t rade and i n t erdependence w ere bui l d i n g b l o cks for worl d p eace, bec a u s e
increase d t r a d e i n t he long run would enhance living s tandards and help reduce t he
econom i c di ssat i s fact i o n t hat can breed war. 5
The end of World W ar II, which redu ced m u ch of Europe and Asia t o political
disarray and economic devastation, provided a test for t he new t rade policy. Questions
o f w a r a n d peace and t he need for U.S. allies t o b ecome economically prospero u s
assumed great urgency, particularly with the advent of the C old W ar. Toward t his end,
dom est i c pol i cy concerns associ at ed wi t h U.S . t rade pol i cy d eci si o n s cam e t o b e
increasingl y s ubordinated t o foreign policy concerns.
In addition t o economic aid, U.S. trade policy was used to bolster the economies o f
Europe and m uch o f Asia and integrate t hem i nto a rules-based a n d nondiscriminatory
international economic system organiz ed under t he newly created General Agreement o n
Tariffs and T rade (GATT). During t he fi r s t d ecade o f t he GATT t rading system (1948-

1958), U.S. policymakers actively encouraged imports and did little to promot e U .S .

ex ports. And ex port controls were employed to restrict commerce with communist bloc
countries, especially to limit their access to t echnologies with military applications.
Given t hat t he United S tates emerged after W orl d W a r II with a predominant
economic position, many observers argu ed that Washingt on could afford to be altruistic
on a global s cale. However, as the economie s o f E urope and J apan recovered i n t he 1950s
and 1960s, U.S. firms and workers began t o ex p erience m uch m ore competition at home
and abroad. Accordingl y, the U.S. p rivate sector began complaining about a U.S. t rade
orientation t hat s acrificed domes tic interests for foreign policy advantage.6
1962-2002: Tilt Back Tow ards Domestic Priorities
The end of the t rade policy era dominat ed by foreign policy objectives was s ignaled
by several events. Retrospectively, one could s ee the s eeds o f change i n t he 1962 Trade
Ex pansi o n Act . In t hi s l egi s l at i on, whi ch aut hori z ed U.S . part i ci p at i o n i n what b ecam e
known as t he Kennedy Round of trade n egotiations, C ongress took an initial s tep i n
making U.S. trade policy m ore attentive t o domestic int e res t s . Propelled by growing
dissatisfaction i n t he private s ector about the dominance of foreign policy considerations
in trade policy, Congress relieved t he Department o f S t ate of its lead negotiating
responsibility on trade i ssues, and created the position o f t he Special Trade R epresentative
(STR) - t he precursor of the Office of the United S tates Trade Repres entative.
A m ore d efinitive s hift occurred i n August 1971. In that month, with an overvalued
dollar contributing t o a rapid decline i n U.S. t rade surpluses, Pres i d e n t Nix on took the
world b y s urprise b y acting t o reduce t he value o f t he dollar. He did t his b y s uspending
the U.S. obligation t o s upport t he value of its currency b y s elling gold reserves o n d emand
a n d b y imposing a “temporary” 10 percent s urcharge on al l i m port s . T he eff e c t w a s t o

5 Raymond J . Ahearn. “Political Determinants of U.S. Trade Policy,” ORBI S, Summe r 1982, pp.


6 Stephen D. Cohen, et. a l. Fundamentals of U.S. Foreign Trade Policy, p.35.

end a U.S . postwar policy o f altruism that, i n p art, accepted t hat U.S . p roducts would b e
sol d at a d i s advant age b ecause of unfai r ex change rat es.
In the 1970s and 1980s, with the U.S. economy b ecoming i ncreasingl y ex posed to
trade and foreign competition, particularly from J apan and t he new Asian tigers, the U.S.
trade policym aking p endulum began swi nging even m ore t owards domestic priorities and
interests. In the 1974 Trade Act, C ongress began t o u se trade policy t o cushion the d ecline
of weak industries b y encouraging favorable findings i n import relief cases. In t he early
1980s, l egislative emphasis s witched t o openi ng foreign m arkets for U.S. ex porters as an
alternative t o closing U.S. market s t o imports. This m ovement for great er reci procity in
U.S . t rade rel at i ons was m arked b y t he creat i o n o f v ari ous st at ut ory p rocesses t hat forced
t h e e x ecutive branch t o s ys tematically addres s and redres s t he ex tent to which f o r ei gn
unfair t rading practices were burdening U.S. commerce. In addition, Congress began t o
k e e p t h e ex ecut i v e b ranch o n a short er l eas h — provision of tightly defined goal s a n d
consultations- i n order to insure that trade negotiations were not used as an instrument of
foreign policy.7
This is not to say t hat t he United S tates did not use t rade for foreign policy purposes
during t his p eriod. The U.S. d enial o f m os t-favored-nation-treatment to communist
countries, o ften combined with ex port controls or embargoes, and p referential agreements
such as the Generalized System of Preferences, t he Caribbean Basin Initiative, and t he
U . S . -Israel i free t rade agreem ent are al l ex am p l es o f t he use o f t rade pol i cy t o achi eve
foreign policy objectives . But they were pursu ed against a backdrop of growing emphasis,
particularly in Congress, on domestic considerations.
With the fal l of t he Berlin Wall, a m aj or constrai nt on el evating domestic economic
objectives was lifted. While the C old W ar tended t o provide the United S tates, Europe,
and J apan an overriding rationale to compromis e o n economic issues in order t o m aintain
a grand anti-Soviet alliance, the d isappear ance of a common enemy opened opportunities
for all countries to more aggressively promote domestic economic objectives.8
Post 9/11: A Tilt Tow ards Nati onal Security Priorities?
The events o f S eptember 11, 2001 may h ave s et the s tage for t rade to be utilized
m o re ex tensively as an i nstrument o f U.S. f orei gn and n at i onal s ecuri t y pol i cy. In a
speech del i v ered 10 days before t h e openi ng of t h e W TO t rade m i n i s t eri al i n Doha, Q at ar
t o launch new gl obal t rade negotiations, U.S. Trade Repres entative R obert Zoellick
ex pl ai ned how a s uccessful m eet i n g was necessary i n t h e fi ght agai nst t errori sm . 9
T he e ve nts of September 11 have set t he stage f or our work.... J ust as our Cold War
strategy recognized the i nterconnection of s ecurity and economics, so must America’s
strategy against t errorism. By promoting t he WT O’s agenda ... these 142 nations can
counter the r evulsive destructionism of terrorism.

7 Stephen D. Cohen, et. a l. pp. 36-39.
8 Destler, I.M. American Tr ade Politics, Institute for International Economics, 1995, p. 62.
9 Robert B. Zoellick, “T he WT O and New Global T rade Negotiations: What’s At Stake?” Speech
delivered at the Council on Foreign Relations, Washington, D.C. October 30, 2001.

The Administration’s effort to link t he need for a successful Doha Round with the
fight against terrorism was widel y credited with facilitati n g t h e l aunch of global
negotiations. National s ecurity and associ at ed concerns helped to provide an overriding
need for agreem ent and consensus t o b e reached.
Subsequently, t he Bush Administration has staked out a l arger role for foreign policy
considerations in the choice of potential free t rade agreement p artners. In a M ay 8, 2003
speech, USTR Zoellick s tated t hat countries s eeking f r e e t rade agreements with the
United S tates m ust, at a minimu m, cooperate with the United States o n its foreign policy
and n at i onal s ecuri t y go al s. 10 Accordingl y, some of the countries that backed the U.S.-led
invasion of Iraq or supported t he war o n t e rrorism — s uch as Austral i a , Bahrain,
Dominican Republic, s everal Central American countries, Morocco, and Thailand — have
been rewarded with design ation as a free t rade nego tiating p artner. Others t hat h av e not
shown s imilar s upport for U.S. foreign policy goal s , s u c h a s New Zealand and many
Caribbean countries, h ave b een ignored. 11
This ex plicit foreign pol i c y t est h as raised concerns in both C ongress and t he
busines s community that future free t rade agreements could come at t he ex pense o f U.S.
economic interests. Speci fically, s ome have q u e s t i oned whether the administration’s
decision to nego tiate agreements with Morocco and Bahrain, countries that have small
markets but are o n t he front line i n t he war against terrorism, could come at t he ex pense
of countries such as Taiwan and E gypt that ar e m ore commercially sign ificant m arkets. 12
There are also concerns about subordinating U.S. economic interests to broad foreign
policy concerns regarding rel ations with J apan and China. With security objectiv es of
coax ing China to keep North Korea from going nuclear and getting J apan to commit
troops and m oney t o Iraq, some argu e t hat t he administration h as elected not to pressure
these countries to accept a rise in the v alue of their currencies against the dollar - a change
that could h elp reduce t he U.S. trade d eficit with these countries.13
While security considerations appear to be playing a larger role in U.S. trade policy
decision making since 9 /11, there are al so numerous counter-ex amples — s u c h a s the
i m position o f s teel tariffs and p assage of the Farm Bill in 2002 — where domestic
economic and political concerns appeared paramount. W hether the war against t errorism
leads t o a new and consistent pattern of trade policy deci sions remains uncertain.
Congress, with constitutional responsibility “to regulate foreign commerce” is bound to
play a m aj or role in determining how the bal ance between domes tic and forei gn priorities

10 Inside U.S. Trade, ”Zoellick Says FT A Candidates M u s t S u pport U.S. Foreign Policy,” M ay


11 Financial Times, “Strains Show in U.S.-Caribbean Relations,” October 23, 2003, p.2.
12 Inside U.S. Trade, “Business T reads Carefully In Assessment of Administration T rade Policy,”
13 C . F r e d Bergsten, “ Muzzling Our Economic Negotiators,” Washington Post, September 10,