Studies in Economic Nationalism

4

NOTES ON THE HAVANA TRADE CHARTER (1948)*

The signing in Havana on March 24th 1948 of the Final Act of the United Nations Conference on Trade and Employment brought to a close three years of negotiating and drafting successive texts of the Charter for an International Trade Organization. The results of that long and painstaking effort are now before us and will become, undoubtedly, the object of very careful scrutiny throughout the world, in chancelleries, universities, business organizations, etc. It is not my intention in this article to provide a detailed analysis of what is henceforth to be known as the Havana Charter. However, having been fortunate enough to be able to follow from very close quarters, though not in a governmental capacity, the Geneva and Havana conferences devoted to the drawing up of the Charter, I shall endeavour in the pages that follow to explain the basic reasons for the Charter’s present form and to appraise its significance in relation to the future shape of international economic relations.

ECONOMIC NATIONALISM AND THE I.T.O.

Probably the most striking impression that an observer could obtain at the Geneva Conference of last summer or at the Havana Conference which has just come to a close was of the strength of economic nationalism throughout the world. Not only did most delegates constantly and consistently emphasize the need of their respective countries to practise trade restrictions of considerable scope and variety; the very concept of a world economy was almost completely missing from the discussions. Clearly, it was the duty of national delegations to be guided by the national interest of their respective countries; what was striking, however, was the fact that national interest was nearly always viewed only against the background of the particular problems and conditions of each country, without reference to the operating characteristics of a wellfunctioning world economy. Instead of the answers to particular national problems being sought within the broader framework of an international economic system, attainment of the latter was given the status of a secondary, not a primary, goal. Most arguments advanced followed the pattern of showing how a particular set of trade restrictions might benefit the country interested in operating them; no serious effort was made to contrast the benefits received by that country with the disadvantages for other countries resulting from such restrictions. True, the Charter provides that a country adversely affected by trade restrictions imposed by another country may complain to the Organization and, under certain circumstances, may even retaliate in kind. But, whereas these provisions open the doors wide to international recrimination and conflict, they do not add up to a “universalist” or world-economic approach to the national policies of particular countries. The Trade and Employment Conference provided ample opportunity for each participating country to defend its largely nationalistic point of view; but no pattern of international co-operation made its appearance, and no real set of international “rules of the game” in the realm of commercial policy emerged from the long debates.

Whereas the Preparatory Committee of the Trade and Employment Conference included 17 countries, the full Conference had 59 participants. Some members of the United Nations, including the USSR did not take part; some countries which are not members of the United Nations, e.g. Switzerland, attended. The nearly universal character of the Conference undoubtedly became one of its major drawbacks. Even though they depend so greatly upon the rest of the world, the smaller or, at least, economically less developed countries are inspired nowadays by a most ardent spirit of economic nationalism. These countries formed a large majority of the participants in the Havana Conference and their attitudes not inconsiderably contributed to the weakness of the final document. “Protection of economic development through trade restrictions” became the battle cry of the so-called “under-developed countries” which include the Latin-American republics, the Asian countries of the Near, Middle and Far East, as well as several others, with Australia (which could hardly claim for itself an under-developed status) assuming a very effective leadership of the group. In addition to provisions introduced into the Charter to satisfy underdeveloped countries, there are two other groups of provisions, the effect of which is greatly to weaken that document. These are: (1) provisions inspired by the concern experienced by certain countries such as Great Britain, France, etc., over their balance-of-payments difficulties and (2) provisions arising from the importance attached by certain countries such as Australia, New Zealand, etc. to leaving full scope for national planning for “full employment.”

These three vital issues — economic development, employment, balance-of-payments difficulties — can all be dealt with, of course, in an internationally-minded way. In actual fact, however, the approach to their solution at the London, Geneva and Havana conferences was invariably nationalistic. The attitude taken, generally speaking, was like this: “Such and such are the policies we, Country A, would like to adopt — or might like to adopt — to deal with our balance-of-payments deficit, with our employment problem, with our industrialization program. The rules of the I.T.O. must be so written as to enable us to carry out such policies as we choose to adopt.” An attitude more conducive to international co-operation and to a sound world economy would have been: “Such and such are the requirements of an equilibrated world economy. Our particular national problems must be dealt with by methods compatible with the necessary international ‘discipline’.” In addition, to make things worse, no serious attempt was made to draw a sharp and clear dividing line between the long-range principles incorporated in the Charter and its short-term transition-period provisions. As a result, the long-term principles included in the Charter are so qualified by numerous exceptions, “escape clauses” and interpretative notes that they can hardly become effective guides to practical governmental action, even in the long run.

This is an unhappy state of affairs but it could in no way be described as surprising. A world trade charter favourable to the growth of non-discriminatory multilateral trade could result only from the adoption by the great trading nations of the world of a point of view in which the choice of their particular national policies would be subordinated to a well-operating world economy. So long as the maintenance of freedom of national action is considered to overrule the essential requirements of international economic solidarity, no satisfactory agreement can be reached and the future of international economic relations remains precarious. The maintenance of a country’s foreign payments in a condition of long-run balance, the maintenance of economic activity and employment at high levels, and the furtherance of economic growth are, all of them, entirely compatible with the maintenance of substantial freedom of international trade. Economic literature provides plenty of material to support such a contention, though it is certainly necessary to proceed to a new demonstration of it because of both the widespread acceptance nowadays of the doctrines of economic nationalism and the influence these doctrines exercise over the governmental policies of most countries of the world.

For purposes of practical action, the absence of an international approach to economic stability, to development and to balance-of-payments equilibrium comprises the most important and urgent “unsettled issues.” They should evidently have been settled before the drawing up of the final draft of the I.T.O. Charter. Even though the Havana Conference adopted a charter it still remains important that these issues be thoroughly explored, so that the document may gradually be amended and eventually become an effective instrument of international co-operation — instead of remaining what it now is, a striking testimony to the ubiquity on our planet of strong economic nationalism.

TRADE RESTRICTIONS UNDER THE I.T.O. CHARTER

When the project of establishing an International Trade Organization was first formulated by the United States, its purpose was to provide the world with an instrumentality for gradual achievement of a significant reduction of tariffs and elimination of quantitative trade restrictions and discriminatory treatment in international trade. A first major exception was introduced into the original Proposals for the Expansion of World Trade and Employment (December 1945) to enable countries in balance-of-payments difficulties to limit their imports by means of quantitative trade restrictions. In the further work on the Charter of the I.T.O. this provision grew into the very elaborate Article 21 of the Havana text. In addition, quantitative trade restrictions have been admitted in a number of other cases by virtue of Articles 13 and 20 (paras. 2 and 3). The former of these is particularly important, referring as it does to the protection of “economic development” by means of quantitative trade restrictions. In the London version of the I.T.O. Charter (November 1946) exceptions under Article 13 could be applied only after obtaining prior approval from the I.T.O. This most important prerogative thus given to the Organization was limited in scope in the Geneva draft of the Charter (August 1947), whereas the final or Havana draft whittled it down to almost nothing. When the process of “erosion by amendments” had been completed, all that remained of the principle of “prior approval” was its purely verbal affirmation, though in most of the cases likely to arise in practice the Organization will have to grant its approval, once the applicant country has shown that its case falls under one of several comprehensive headings listed in Article 13 of the Charter.

The principle of non-discrimination was forcefully stated in the early versions of the Charter. It has been qualified by important exceptions in the Geneva draft to enable countries in balance-of-payments difficulties (a) to give priority to essential imports over less essential ones and (b) to use their “weak currencies” in a manner entailing discrimination against “hard-currency” countries. At Havana this question came up for very considerable discussion resulting in the final and very complicated draft of Article 23. It is of interest to note that this article, in its final version, is one of the few provisions of the Charter in which a clear-cut distinction is made between the transition-period and the long-term arrangements. For the transition period there is now a great deal of latitude regarding discrimination, whereas in the long run discriminatory applications of quantitative restrictions will have a considerably more limited scope. The original idea of attogether eliminating discriminatory treatment from international trade relations has now been so altered as, in effect, to admit the principle of discrimination for a number of carefully defined situations.

Preferential agreements also are now admitted in a number of cases, in connection with the establishment of customs unions and with more limited trade agreements designed for “free-trade areas” (Article 44), as well as to promote economic development (Article 15). This is a complete departure from the original intention of prohibiting all new tariff preferences, while eliminating gradually all the existing ones. The scope of export subsidies has also been broadened in Geneva and in Havana (Articles 25 to 28). The most-favoured-nation clause is maintained as a principle of commercial policy by virtue of Article 16, with qualifications resulting from the maintenance of preferences. This would be a more important provision if the scope of quantitative trade restrictions were less than it is under the Havana Charter. The original intentions of the authors of the I.T.O. project notwithstanding, quantitative trade restrictions will remain under the Charter a far more important instrument of commercial policy than tariffs; since the most-favoured-nation clause does not apply to quantitative restrictions, its significance is correspondingly limited.

Under the Charter any country that has balance-of-payments difficulties or has embarked on a program of industrialization may resort to a substantial use of quantitative trade restrictions without obtaining prior approval from the I.T.O. This is the weakest as well as the most characteristic feature of the trading system defined in the Havana Charter. Because it results from the way in which the three previously-mentioned “unsettled issues” were handled by the authors of the Havana Charter, it is most important to analyse these issues more fully in the pages that follow.

UNSETTLED ISSUES

Employment Policies

One of the most vexing economic problems confronting the world is how to reconcile with the requirements of a world economy policies aiming at stable economic activity at high levels of production and employment. If we had a better understanding of the issues involved and an adequate degree of economic co-operation, we could approach the problem on a world scale. In the absence of both that knowledge and that co-operation, individual countries frequently incline towards planning of thier economic policies independently of one another. Sooner or latter they find that foreign economic developments affect their domestic plans. One speaks then of external deflationary or inflationary pressures and takes steps to prevent these pressures from interfering with domestic economic plans. By adopting policies of “insulation,” however, one disrupts the normal currents of international trade and capital movements.

It is a curious comment on man’s inability to learn from experience that there should be in the world today so much support for independent national planning for economic stability, considering how badly all such plans failed during the decade of the ’30’s. True, the League of Nations published as one of its “swan song” reports a study, Economic Stability in the Post-War World, which appeared in 1945 and outlined an approach to the problem that was full of promise; but this pioneering effort has not been followed up since. In the long course of the work preparatory to the Havana Conference little was said about an international approach to the problem of economic stability; instead, independent national planning carried out behind a screen of trade restrictions has been accepted as legitimate.

The concern over full employment dovetails, in many cases, with the adoption of state socialistic planning of the economic life of the country. Such planning is possible, of course, only within the territory over which the particular government exercises sovereign power. What happens beyond the boundaries of that country is outside the control of its government, and may be frowned upon as an unwanted foreign interference with domestic planning. It is sobering to reflect that socialism, which started its career under internationalist slogans, is now firmly wedded to political nationalism. By one of those curious turnabouts, which the sardonic Muse of History seems to enjoy so much, it is now socialism which invokes national sovereignty in support of its national planning.

Economic Development

The most widespread progress in economic growth of the underdeveloped areas of the world has been achieved when the flow of international commerce was freest and capital movements from the more advanced to the less advanced countries were most abundant. At the end of the second world war, concern over economic development had become very strong throughout the world, but by a curious intellectual and political distortion this has led, not to the adoption of more liberal trade policies but, on the contrary, to a great accentuation of economic nationalism.

It is true that nearly a century and a half ago a great American statesman propounded a theory that the growth of young industries could be assisted by protective tariffs. But Alexander Hamilton was thinking of moderate and, most of all, of temporary restrictions. He would certainly not have acquiesced in the way in which today the most drastic and intransigent restrictionist policies are defended on the grounds that they protect new industries. At the same time, the countries most concerned over their economic development tend to under-estimate the importance of securing an adequate influx of foreign capital; their governments show the greatest possible reluctance to grant to foreign investors such assurances of fair treatment as would make them willing, in spite of painfully recent memories of past defaults and new threats of nationalization, to venture into foreign lands. One might well ask: “If trade restrictions are all that is needed to promote economic development, why is it that the so-called under-developed countries are not much further along on the path of economic growth?” To that question no satisfactory answer can be obtained.

As in the case of employment policies, it is not the goal which is questioned here but the means by which individual countries propose to attain it. In the Havana Charter for World Trade, economic development as well as employment is used as justification for the adoption of new restrictions on international trade; in neither case have any provisions been inserted which would indicate a realization that productive employment, high levels of efficient production and promising economic development all depend upon the achievement and maintenance of a soundly expanding world economy.

On the contrary, we are faced today with a “myth of economic development,” a myth according to which a country can best promote its economic growth by the use of stringent trade restrictions, free from any major international commitments in the realm of commercial policy. Such a concept is sheer fallacy. It ignores not only the teachings of economic theory but also the century-long experience of economic practice. Instead of being used as an argument in favour of more abundant investments and freer trade, economic development is being used as an argument for breaking up still further the already very precarious world economy.

Balance-of-Payments Difficulties

The depression of the ’30’s and the second world war have resulted in widespread and deep-rooted dislocations of international trade, in the liquidation of many foreign assets and in new international indebtedness. The most dramatic case, and one which presents the world with an extremely difficult problem to solve, is that of Great Britain. As a result of the depression and war-born dislocations, serious balance-of-payments difficulties are experienced by most countries of the world; they are unable to pay for their current import requirements (and financial commitments) with the proceeds of their exports (and the income derived from their foreign investments, if any). In addition, the difficulties of many countries are increased in consequence of their policies of economic “insulation,” to which reference has been made before.

In order to gradually liquidate the balance-of-payments difficulties that are so upsetting at the present time, two lines of policy are evidently necessary: (1) economic assistance such as envisaged by the Marshall Plan to bridge for war-torn countries the period of essential and difficult readjustments and (2) the adoption by these countries of policies which would tie their economy more closely to that of other countries and would increase the flexibility of their cost-price structures. What is necessary, in addition, is revival of the spirit of competitive enterprise which has always been a vital factor in the expansion of foreign trade. Only by making its economy more productive and more flexible and by integrating it more closely with the world economy can a country achieve lasting improvement in its international economic position.

It is characteristic of the present condition of economic thought and statecraft that these considerations seem to have been absent from the councils in which the Havana Trade Charter was elaborated. Instead, a different concept has been applied, the simplicity of which is equalled only by its fallaciousness. What it boils down to is this: if a country is in the throes of balance-of-payments difficulties, it must be allowed to protect its international position by means of import quotas and the like. That balance-of-payments difficulties may be due to the domestic policies of the countries suffering from them is recognized in the Charter of the I.T.O., but only obliquely and with wrong conclusions. According to Article 21, para. 4 (b), members of the I.T.O. recognize that, as a result of its domestic employment or development policies, “a member may find that demands for foreign exchange on account of imports and other current payments are absorbing the foreign exchange resources currently available to it in such a manner as to exercise pressure on its monetary resources which would justify the institution or maintenance of restrictions under paragraph 3 of this Article.”

If the Charter were inspired by the concept of an organic world economy the above recognition would lead to a rule that countries should pursue their domestic employment or development goals in a manner that would not upset their balance-of-payments equilibrium. The exact opposite, however, appears to be the Charter’s philosophy. Just after the sentence quoted above, Article 21, para. 4 (b) (i) goes on to say: “No member shall be required to withdraw or modify restrictions which it is applying under this Article on the ground that a change in such [employment or development] policies would render these restrictions unnecessary.” This is reenforced by the provisions of Article 6 of the Charter, devoted to “safeguards for members subject to external inflationary or deflationary pressures.” This article amounts to an explicit acceptance of the principle of economic “insulation” with respect to business-cycle policy — a principle which is the very negation of the concept of a world economy.

In this connection Professor D. H. Robertson’s observations in a recent article appear to be particularly pertinent: “What are politely called ‘balance-of-payments difficulties’ do not necessarily drop like a murrain from heaven … any nation which gives its mind to it can create them for itself in half an hour with the aid of the printing press and a strong trade union movement.”2

In the whole modern armoury of economic nationalism no argument is more superficially plausible, more misleading, and more devastating in its applications than that which justifies import restrictions by the need to eliminate balance-of-payments difficulties.

CONCLUSION

It is because these great “unsettled isues” have not been settled in an international spirit that the Charter has acquired its present form. It follows from the foregoing discussion that the prevalence of economic nationalism is to a considerable extent due to the effect of the war upon many countries and upon international economic relations. When, with the help of the European Recovery Program and other measures throughout the world, the war damage is finally restored, there may be a good chance to revise and improve the I.T.O. Charter. That document itself (Article 101) provides for “a general review of the provisions of this Charter” by a special session of the I.T.O.’s Conference about the end of the fifth year after the entry into force of the Charter. This will be the first major opportunity for a fundamental revision of the Havana Charter and those who have at heart the prosperous growth of friendly international economic relations must hope that this opportunity will not be missed. In the meantime, much preliminary work should be done on the subject of “unsettled issues.”

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1 Cf. Economic Journal, London, December 1947.