Studies in Economic Nationalism

5

HOW IHE U.S. LOST THE ITO CONFERENCES (1949)*

It is not my present purpose to engage in a detailed discussion of the Havana Charter, nor to give reasons why I believe, as I do, that it is a harmful document which should not be ratified by Congress. What I purpose to examine is another aspect of the problem: the course of action that resulted in American delegates’ signing a document which denies rather than confirms the basic objectives of American economic policy.

The ITO project has its origin in the fact that in the U.S. (and in the State Department in particular) an important lesson had been learned from the economic frustrations of the interwar period. A dismal fate epentually befell the American initiative, however, because our authorities have not learned certain other, equally important lessons of those years.

The first lesson, which we learned, was the importance of adopting, immediately after the war, agreements that would definitely commit the signatories ot abstain from policies of economic nationalism. This was recognized in documents such as Article 7 of the master lend-lease agreement, which carried precise commitments by the recipients to work with us, after the war, for the elimination of major trade barriers and all discriminatory trade practices. The second lesson, to which little or no attention seems to have been paid, is that no meaningful international economic agreement can, in an ideologically divided world, be secured on a universal basis. The failure of the London Conference of 1933 and of the mission undertaken in 1937 by Paul Van Zeeland, on behalf of the French and British governments, illustrates the futility of a universalist approach and the need for a selective one.

There were two basic flaws in the State Department’s Proposals for Expansion of World Trade and Employment, which it published simultaneously with the Anglo-American loan agreement in September, 1945, after extensive confidential negotiations with the British Government. One flaw was strategic, the other intellectual. I happen to know that attention of high State Department officials was directed to these flaws soon after the publication of the Proposals and that they were warned of the bad effect they might have upon the further course of ITO negotiations.

Let us start with the strategic flaw, of which the intellectual one was a consequence. Instead of publishing its own concrete proposals, the Government of the U.S. decided first to negotiate with the British Governement to get a mutually acceptable text. Had this plan, good or bad, been consistently followed through, an original Anglo-American statement would have been presented to the world by the two governments acting in unison. But such was not the case. The document was an Anglo-American compromise. It included, in particular, a section authorizing the protection of balance of payments through import quotas, which was clearly of British inspiration, and brought into the fine project of an International Trade Organization the “Trojan horse” of mercantilist restrictionism. Nevertheless, the document, vitally weakened by compromise, was then presented to the world as a purely American declaration: “Proposals for Expansion of World Trade and Employment — Developped by a Technical Staff within the Government of the U.S. … and Presented for Consideration by the Peoples of the World.” To be sure, an Anglo-American joint statement was issued at the same time announcing that “the government of the United Kingdom is in full agreement on all important points in these Proposals and accepts them as a basis for international discussion” — that much, but no more. The Proposals were given very great publicity and were elaborated into a Suggested Charter for an International Trade Organization, which the U.S. presented to the London meeting of the Preparatory Committee in October, 1946. Thus, instead of having a clear-cut statement of the American position that the American delegates could defend at the London Conference and the gatherings that followed, our delegates in London found themselves defending an Anglo-American compromise as if it had been an undiluted statement of American aims.

The principal intellectual flaw in the Proposals, the result of this strategic error, is found in Section C.2: Members confronted with an adverse balance of payments should be entitled to impose quantitative import restrictions as an aid to the restoration of equilibrium in the balance of payments.

This short statement, through the process of elaboration in the successive ITO conferences, became Article 21 of the Havana Charter. There it occupies four closely printed pages and contains some of the most devastating provisions of that document. The phrase that accepts the use of import quotas as “an aid to the restoration of equilibrium in the balance of payments” was the Trojan horse. It expressed the basic mercantilist conviction that a country is justified in restricting its imports by quotas in order to influence its international accounts in a desired way. Due to the exertions of Adam Smith and his followers, this notion became justly and widely discredited in the nineteenth century as it was increasingly realized that import restrictions (and indeed export subsidies as well) can give only short-lived relief of the country that practices them and this at the cost of harming other countries and disrupting sound trade.

From having discussed this problem time and again with our State Department officials and some of their advisers, I judge, for my part, that the real significance of that British-inspired provision escaped them at the time of drafting the Proposals — and later. I generally met with the attitude that I was taking too gloomy a view of this “exception.” The memory of these conversations leads me to believe that the American intention may have been to regard the balance-of-payments exception as a transition-period clause, but this was never explicitly stated and the consecutive texts of what is now Article 21 of the charter are clearly permanent provisions and not transitional ones. Had the Proposals been issued as an Anglo-American document and had the dangerous implications of Section C.2 been acknowledged, the U.S. negotiators might have fought this exception at the London, Geneva, and Havana conferences. But as far as I am aware these provisions have never been challenged by the American delegation; indeed they have been looked upon as entirely legitimate. Therein lies, I should suggest, one of the reasons for the failure of the ITO effort.

The missed turning point

To be sure, the U.S. insisted on a number of exceptions and escape clauses of its own in the interests of agriculture, of shipping, and of tariff-protected interests. Even weakened by these concessions, however, the original American position could have been quite strong had we made it clear that our interests in the establishment of an ITO depended pretty much on the contents of its charter. But by and by our bargaining position was destroyed by the excessive eagerness of our negotiators to reach a wide agreement on a charter and their insufficient stubbornness when it came to defending basic principles. In Geneva and in Havana the generally accepted view was that the U.S. delegates were so anxious to get a charter that they would, in the end, accept all those changes in that document that would prove indispensable for obtaining its general acceptance.

I must note one important occasion that might have become the turning point in the ITO conversations. On December 23, 1947, at Havana, Clair Wilcox (vice chairman of the U.S. delegation) delivered a very strong speech to one of the conference’s principal commissions. He warned the delegates that they were too complacent about quantitative trade restrictions and were too easily assuming that the U.S. would never introduce such restrictions an its own trade even if they were to be declared acceptable and legal. That speech came close to breaking up the conference. Had it been followed by a shift in the entire American strategy, the whole course of the Havana Conference would have been altered. It might have wound up with a charter conforming better with American ideals; it might have adjourned for the time being without a charter; or again thé entire project might have been abandoned. The last-named course would have been the likeliest, I think, since it appeared very clearly by that time that the overwhelming majority of countries represented at Havana were far more interested in their freedom of action in respect to applying import quotas, discriminatory practices, and the like than in a general suppression of those instruments of restrictive commercial policy. Unfortunately the Christmas spirit that enveloped the conference soon after Mr. Wilcox spoke brought in its wake a wave of mellowness and the road of compromise was resumed early in 1948, never to be abandoned again.

The Anglo-American Proposals elaborated by the U.S. into a Suggested Charter for an International Trade Organization became, as mentioned before, the basic working paper of the London Conference. But after this initial “success” of the U.S., the leadership in the drafting of the charter seems to have passed into other hands, the U.S. assuming a defensive position — defending the Anglo-American compromise as if it had been an exact expression of America’s views and desires, and giving in on very fundamental issues to delegations from state-socialist countries.

The British attacked the Proposals in an attempt to widen the balance-of-payments escape clause, to safeguard imperial tariff preferences, and to protect national freedom of action in the field of economic planning. They were very ably seconded by Commonwealth delegates, two in particular, Dr. Coombs of Australia and Walter Nash, Deputy Prime Minister and Finance Minister of New Zealand. The shift of emphasis was best illustrated by the way two chapters — the one on employment policies and a new chapter on economic development, very effectively sponsored by Dr. Coombs — took on more and more importance in the structure of the charter, in contrast to the chapter on commercial policy, originally intended to be the core of the entire document. Although these chapters on employment and economic development contained no positive guidance concerning the achievement of “full employment” or economic development, they became a significant source of exceptions from the rule of freer multilateral trade that the charter was originally intended to serve.

Later, in Geneva, Dr. Coombs told me that he regarded these chapters as the two pillars of the ITO and that he felt quite confident trade would move briskly and freely between countries once they have reached the condition of secure full employment and once they have set in motion effective programs of economic development. Far from sharing so optimistic a forecast, I asked Dr. Coombs how he reconciled these anticipations with the fact that national economic plans, whether inspired by the concern over employment or over economic development, generally lead to balance-of-payments difficulties and to the adoption of restrictive trade and payment policies by governments that practice them. I received no answer to that question at the time but found it in the final draft of the charter as adopted in Geneva and again in the definitive text adopted in Havana. These provisions (Article 21, paragraph 4b) acknowledge the fact that national economic planning may lead to balance-of-payments difficulties and then proceed to draw conclusions eminently favorable to such planning. To quote from Mr. Nash’s report to the New Zealand Parliament, the provisions of Article 21, paragraph 4b mean that:

… when a conflict arises between the desirability of pursuing policies of economic development and full employment on the one hand and the desirability of avoiding quantitative restrictions on the other, the domestic policies will take precedence. Thus a Member cannot be required to alter or suspend its policies of economic development or full employment on the grounds that such action would remove the cause of the balance of payments difficulties and render the restrictions unnecessary.

Note the world “alter,” which I have underlined. It indicates that by becoming a member of the ITO, a country assumes no obligation whatever to shape its domestic policy so as to avoid disrupting international trade through the application of import quotas, and that it should not even be invited to alter its policies if they are prejudicial to international economic order. In this provision the shift of emphasis in the charter that started in London was brought to full fruition. It is noteworthy that the American delegates didn’t dissent from it at either Geneva or Havana. The only public protest came from the Benelux countries.

In addition to the very successful offensives conducetd by Great Britain and the Commonwealth countries in London, there was formed at that conference an informal bloc of underdeveloped countries largely led and influenced by Dr. Coombs and the active Indian delegation. Later, at Havana, the South American countries suported it on most occasions. The underdeveloped countries were primarily interested in the right to use import quotas as a means of protecting their “infant industries.” Somehow they seemed to attach more importance to that than to ways and means of securing an adequate influx of investment capital from abroad. At Geneva the U.S. and Great Britain formed an alliance against this bloc of underdeveloped countries. Great Britain, to be sure, claimed the right to use quantitative trade restrictions but did so on balance-of-payments grounds, fully realizing the dangers for its export trade in the use of the same devices for protective purposes by the so-called underdeveloped countries. Instead of opposing all import quotas in pursuance of its own view, the U.S. delegation remained faithful to the 1945 compromise with Britain (even though Britain did not stand by it) and limited itself to fighting the claims of the underdeveloped countries. These countries eventually reached, as a matter of fact, an almost complete victory by the process of numerous amendments. At Havana they had an overwhelming majority behind them, while our delegates, whether they admitted it or not, were desperately anxious to have a charter and didn’t match the stubborness of their opponents.

Gradually and imperceptibly, indeed, our delegates seem to have been won over to quite a few of the points of view of their opponents. At Havana they accepted the notion that the ITO “shall have regard, in the exercise of its functions under other Articles of this Charter, to the need of Members to take action within the provisions of this Charter to safeguard their economies against inflationary or deflationary pressure from abroad” (Article 6). This provision was originally introduced in London and referred only to “deflationary” pressure. In Havana a proposal was made to take into account “inflationary” pressure as well. Our delegation briefly and unsuccessfully fought this extension of the scope of the article. Yet is was entirely logical that it should cover both the inflationary and deflationary phases of the business cycle. What was wrong was the fact that such an article was included in the charter at all. My frequent suggestions to the effect that the U.S. should try to get rid of it met with no favorable response, as our delegates seemed to see nothing basically wrong with it. And yet this article represents another victory of the principle of “economic insulation” over that of international economic interdependence. It was this very principle of “insulation,” through trade restrictions, that contributed so decisively to the disintegration of the world economy in the thirties.

A tale of frustration

The initiative in the drafting of the charter slipped away from the American negotiators in London and was never regained. In Geneva they defended the London draft of the charter, at Havana they defended the Geneva draft. I have it on excellent authority that between the Geneva and Havana conferences Mr. Wilcox was earnestly urged to reopen at Havana such basic issues as the right to use import quotas for the purpose of protecting a country’s balance-of-payments equilibrium. I understand that this suggestion was considered impractical because it would disrupt the unity of the seventeen members of the Preparatory Committee which had reached agreement in Geneva, thereby causing other countries to reopen many issues as well. What happened is a matter of record. In the opening phase of the Havana Conference 800 amendments were presented. Most of them were written by countries not represented in Geneva, but members of the Preparatory Committee proved far less devoted to the contents of the Geneva text and to the maintenance of a united front than the State Department anticipated. So the Havana Conference became a tale of frustration. Our delegates did not launch any imaginative campaign for the drastic improvement of the Geneva draft. They did not even stand pat on that draft but allowed it to deteriorate still further.

That is should so deteriorate was inevitable, considering the broad membership of the conference and the ideas emanating from the great majority of delegates. There was no interest in freeing international trade from its shackles. Opinion at Havana was very favorable to import quotas, to tariff preferences, to discriminatory practices, and to exchange control. Along with a few countries, such as Canada and the Benelux group, we were isolated in our desire for free multilateral trade. What was not inevitable, however, was the placing of the American signature under the Havana Charter. Our delegates might have made it clear that we would not accept a charter which deviated too far from the principles of non-discriminatory, multilateral, free-enterprise trade. No such statement was made, with the sole exception of the above-mentioned and quickly forgotten pre-Christmas speech by Clair Wilcox.

It easy to extol the virtues of compromise, but compromise is a dangerous instrument and has to be handled with the utmost care. In 1874 the great English liberal statesman John (later Lord) Morley published a now famous essay, “On Compromise.” Here are his conclusions:

A principle, if it be sound, represents one of the larger expediences. To abandon that for the sake of some seeming expediency of the hour, is to sacrifice the greater good for the less, on no more credible ground than that the less is nearer. It is better to wait, and to defer the realization of our ideas until we can realize them fully, than to defraud the future by truncating them, if truncate them we must, in order to secure a partial triumph for them in the immediate present. It is better to bear the burden of impracticableness, than to stifle conviction and to pare away principle until it becomes mere hollowness and triviality. What is the sense, and what is the morality, of postponing the wider utility to the narrower? Nothing is so sure to impoverish an epoch, to deprive conduct of nobleness, and character of elevation.

Had Lord Morley’s essay been read by our delegates before they embarked for London and reread from time to time in the months that followed, we might have been spared the necessity now of deciding whether or not to ratify the charter.

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