Preferential trade and World War II

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Preferential trade played a bigger role in history than I knew. From a new book chapter (pdf) by Douglas A. Irwin, Petros C. Mavroidis & Alan O. Sykes:

At a conference in Ottawa in 1932, the United Kingdom and its dominions (principally Australia, Canada, India, New Zealand, and South Africa) agreed to give preferential tariff treatment for each others’ goods. This scheme of imperial preferences involved both higher duties on non‐Empire goods and lower duties on Dominion goods and drew the ire of excluded countries for discriminating against their trade…

Having been chosen by Roosevelt to serve as Secretary of State, Hull was uniquely positioned to pursue his belief that freer trade might lead to economic and political conditions that would be more favorable to peace. Hull fought a long and hard bureaucratic battle to ensure that the official U.S. government position on international trade policy was the State Department’s vision of a world more open to trade and free from discriminatory commercial policies…

Hull was an especially sharp critic of imperial preferences for their adverse effect on U.S. exports. Testifying before Congress in 1940, Hull called imperial preferences “the greatest injury, in a commercial way, that has been inflicted on this country since I have been in public life”…

The outbreak of the European war in September 1939, and particularly the fall of France in June 1940, put the United States in the awkward position of formal neutrality and yet having a vital stake in the survival of the United Kingdom. With American public opinion opposed to any direct military involvement in the war, the Roosevelt administration sought to provide assistance to Britain through the Lend‐Lease program…

A key provision of Lend Lease was its deliberate disavowal of any requirement for a financial settlement for the goods provided. This provision aimed to avoid the difficult problems associated with debt repayments after World War I. Instead, as compensation for the assistance, Britain was required to provide a “direct or indirect benefit which the president deems satisfactory.” This unspecified benefit became known as “the consideration” and was the price that Britain would have to pay for American aid.

The decision to settle Lend Lease debts without monetary or financial repayments had a profound impact on the shape of the postwar economic system. The United States decided to extract foreign policy promises from the United Kingdom and require its participation in a new world economic framework…

This put Cordell Hull and the State Department in a much stronger position to eliminate imperial preferences than they had been in 1938 when they sought to do so in a reciprocal trade agreement. In 1941, Britain required American assistance and was in a much weaker position. Hull therefore aimed to use “the consideration” to extract from the United Kingdom a pledge to abolish imperial preferences and secure Britain’s support for a more liberal and non‐discriminatory international trade regime. Early State Department drafts of the lend lease agreement called for the elimination of all imperial preferences.

In June 1941, John Maynard Keynes, representing the UK Treasury, was dispatched to Washington to discuss the possible terms of a mutual aid agreement… Assistant Secretary of State Dean Acheson presented Keynes with a draft aid agreement… This produced a long outburst from Keynes, who was dismayed at what he perceived to be an attempt to force unilateral obligations on the United Kingdom by taking aim at imperial preferences and other trade controls that might be desirable in the postwar world. Keynes privately dismissed this first draft of Article VII as the “lunatic proposals of Mr. Hull.”…

Keynes was shocked, in this instance and many others, at what he viewed as the State Department’s outdated nineteenth‐century laissez‐faire ideology of simply reducing government trade intervention in the postwar era…

The precarious political position of the Churchill government was the key reason for its caution. Churchill himself had been a lifelong supporter of free trade and opponent of imperial preference. In 1903, Churchill left the Conservative party and joined the Liberals over Joseph Chamberlain’s plan to introduce tariff preferences for the Empire, although he later rejoined the Conservatives. But as leader of a coalition wartime government, Churchill refused to take a strong stand on the issue. This is because the Conservative faction in the government, led by Leopold Amery, the Secretary of State for India, strongly supported close ties to the former colonies. The Conservatives threatened to revolt, possibly bringing down the government, if a promise was made to dismantle imperial preferences…

[The Mutual Aid Agreement was signed in February 1942.]

Some in the State Department believed that Britain had definitively committed itself to eliminate imperial preferences. By contrast, U.K. officials believed that they had merely agreed to put preferences on the bargaining table as something to talk about at a future date… This divergence in interpretation persisted right down to the final hours of the Geneva GATT negotiations in October 1947.

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One Response to “Preferential trade and World War II”

  1. Ben Muse Says:

    In the beginning…

    The General Agreement on Tariffs and Trade (GATT) is the 1947 agreement that provided a framework for the gradual reduction of tariffs and the expansion of trade since the Second World War. This document is one of the load-bearing walls

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