international trade policy in the 1980s: prospects and problems

International Trade Policy in the 1980s: Prospects and ProblemsAuthor(s): Raymond VernonSource: International Studies Quarterly, Vol. 26, No. 4 (Dec., 1982), pp. 483-510Published by: Wiley on behalf of The International Studies AssociationStable URL: http://www.jstor.org/stable/3013960 .

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International Trade Policy in the 1980s

Prospects and Problems

RAYMOND VERNON Harvard University

In assessing the possibilities for change in the international trade regime, U.S. policy is critical. That policy has consistently contained two strands: a long-term commitment to the principle of open markets, a commitment repeatedly reaffirmed in good times and bad; and a tendency to stray from that commitment in individual cases, a tendency that derives from certain deep-seated structural features of U.S. government. The central principles of the General Agreement on Tariffs and Trade, reflecting U.S. ideological preferences, are nondiscrimination, the continuous reduction of trade barriers, and the mediation of trade disputes. Over time, the strength of these principles has gradually been worn away by a stream of legitimated exceptions. For the present, there is no serious possibility of restoring that strength. A second-best possibility, with uncertain long-term implications, is to pursue the objective of open markets through initiatives that are less than global in their reach. Nevertheless, although key principles of the GATT are in eclipse, the institution itself must be retained as an important instrument for talking out trade disputes and as a potential launching pad for new initiatives when such initiatives again become feasible.

The past thirty years have seen a remarkable reduction in the trade barriers that once existed among the world's principal trading states. The tariff rates of the advanced industrialized countries, for instance, have been cut to about one-quarter of their previous levels. The import licensing schemes that were in effect in all but a few of these countries in the early 1950s have long since been dismantled. More recently, those countries have

AUTHOR'S NOTE: This article has borrowed copiously from the author's Edmund Janes James Lecture delivered at the University of Illinois in 1981.

INTERNATIONAL STUDIES QUARTERLY, Vol. 26 No. 4, December 1982 483-510 ? 1982 I.S.A.

483



484 INTERNATIONAL STUDIES QUARTERLY

made a promising start on nontariff trade barriers in the form of a series of negotiated codes. In recent years, too, even a few of the developing countries have taken steps to reduce their import restrictions.

Yet, despite these remarkable developments, there is every- where a sense of foreboding. There is a widespread expectation that the world is in for a period of protectionism as states respond to a reduction in their growth rates by closing their borders to foreign goods. So far, to be sure, the prospect does not seem to have materialized (at least not in any acute form), but the expectation persists. The need to understand the basis of that expectation, as well as the probability of its realization, is also strong.

U.S. Policy

The policies of the United States are particularly critical in assessing the future. In decades past, this country served as the principal energizer and organizer of projects for the reduction of trade barriers, as in the formation of the General Agreement on Tariffs and Trade (GATT) in 1948, and in the succession, in the following decades, of giant tariff negotiation sessions. However, the future behavior of the U.S. government cannot easily be assessed without reference to the institutions and the history on which its past actions have been based.

A STYLE OF GOVERNANCE

The United States has been committed to open competitive markets and nondiscrimination among its trading partners. Its trade policies over the past thirty or forty years, when viewed as a whole, seem remarkably stable. At the same time, when viewed in detail, those policies have appeared riddled with inconsistency and contradiction. Behind this combination (stability in the large, inconsistency in detail) lies a structure of government and a philosophy of governance that are fairly unique in world societies.



Vernon / INTERNATIONAL TRADE POLICY 485

The stable aspects of U.S. trade policy during the past fifty years have rested on a persistent American view that a world system of open competitive markets is in the country's interests, and on a related assumption that such a system could be realized under U.S. leadership. International negotiation was seen as the main instrument in the achievement of that objective; and U.S. trade policy had to be shaped in ways that would increase the chances of success of such negotiations.

The seeming inconsistencies of U.S. trade policy have been due to various factors, same of which trace back to the extraordinary diffusion of power in the U.S. system of governance. Lord Keynes, on observing U. S. governmental behavior in the midst of World War II and under the strongest president in its modern history, was reported to have said to a U.S. delegation, "But you don't have a government in the ordinary sense of the word." Elaborating on the point in his memoirs, Keynes notes that "the Administration, not being in control of Congress, is not in a position to enter into commitments on anything" (quoted in Salant, 1980: 1058).

That special attribute of the U.S. system of governance has been more evident in some administrations than in others, but the roots go far back in its history (see, for instance, Epstein, 1967: 193-198; Alford, 1973: 94-122, 219-248, 309-318; Chambers, 1966: 83; and Krasner, 1978: 61-69). The extensive overlap of authority among the three main branches of the U.S. government, consciously provided for in the Constitution, explains part of the dilution of power. Anomalous government agencies, such as the "independent" International Trade Commission (ITC), have added to the pattern. The device of the congressional veto, increasingly applied in the 1970s, has accentuated the diffusion (Gilmore, 1982). And numerous "sunshine laws," buttressed by prolific rights of suit and appeal, have added to the conditional and uncertain quality that characterizes the exercise of governmental power in the United States (see, for example, Marks, 1978; Green, 1980).

The seeming incoherence in the day-to-day behavior of the U.S. government must also be attributed in part to the character of its bureaucracy. As is not the case in Britain, France, or Japan,




the U.S. public has always resisted the idea of a tightly knit professional bureaucracy. Partly as a result, American values are not offended when a new president and his cabinet bring a fresh team of high administrators into office with them (for example, Jacoby, 1973: 26-85). These administrators can be drawn from anywhere, from different professions, geographical origins, even ideologies (Heclo, 1977).

But the consequence of the curious style of U.S. governance is not always immobility, as Keynes implied. On the contrary, the loose-jointed and unfocused nature of the structure allows a persistent pressure group, when allied with a resourceful pol- itician or an energetic bureaucrat, to beat the system. U.S. bureaucrats and politicians, in sharp contrast to, say, Japanese bureaucrats and politicians, do not ordinarily feel the need to develop a broad internal consensus before they act. Indeed, given the heterogeneous aspects of the country's structure, consensus could well prove impossible. Instead, successful bureaucrats and politicians usually see the challenge as one of threading their way through the political maze, bypassing the opposition and captur- ing the power of government for some transitory or limited objective (Halperin, 1974: 101).

U.S. actions in the field of international trade, therefore, have been the product of two distinct processes. One of these has been based on the bedrock preferences of the country; it has created a succession of international negotiations that have served as action-forcing events to produce a fairly continuous decline in import restrictions over the past three or four decades. The other has been a succession of unilateral acts on the part of the United States, restrictive in nature, which have represented the sporadic successes of special interest group in achieving their objectives through one or another of the various avenues for political action that the system characteristically provides. The 1980s could generate either pattern of behavior; history provides some hints of which pattern is likely.

PREWAR ORIGINS, 1934-1945

One piece of conventional wisdom, less reliable than most, is that depressions have been the triggers that have led the United




States in the past to apply restrictive trade measures. The facts suggest much more complex conclusions. The notorious Smoot- Hawley Tariff was formulated between 1928 and 1930, after a prolonged period of prosperity. The Trade Agreements Act was first developed in 1934, in the midst of a depression in which unemployment reached record levels of 25% in the United States, and large-scale social programs to assist the unemployed were still a novelty. It was then that the country undertook, for the first time, a long-term commitment to negotiate with other countries for the lowering of its tariffs and other import restrictions.

During the four decades after 1934, it became evident that the commitment to the policy of lowering trade barriers was deeply rooted in the body politic of the United States. In these years, the issue was repeatedly reconsidered. Although the margins of support were sometimes narrow and although new reservations and conditions were introduced with each successive commitment, the general direction of the policy remained clear (Pastor, 1980: 67-200). Moreover, the years in which some of the important renewals occurred-notably 1945, 1962, and 1974- were years of relative turmoil and stress, not years of tranquility. The 1945 debate was conducted at a time of grave national concern over the problems of transition from a wartime to a peacetime economy, the 1962 debate occurred at the end of a yearlong recession, and that of 1974 occurred in the midst of an acute bout of stagflation.

The origins of the widespread support for an open trading system in the United States are of only marginal interest today. But the movement is easily traceable to the growing confidence of the United States early in the twentieth century in its strength as an industrial power (Lefeber, 1963: 1-63; Smith; 1981: 138-157). The Wilson administration's emphasis on the open door policy, the U.S. Tariff Commission's adoption in 1923 of the nondiscrimination principle in the application of import duties, and the indignant protest of practically all of America's leading economists to the passage of the Smoot-Hawley Tariff (New York Times, 1930) were manifestations of the pervasiveness of the open market sentiment. Yet a coalition of special interests, using its power over individual members of Congress, could briefly muster the strength to bypass the opposition. It was not until four years




later, with the passage of the Trade Agreements Act of 1934, that the United States was drawn back to its basic preference for open international markets.

THE HEGEMONIC PERIOD, 1945-1962

The United States came out of the war with a profoundly changed perception of its place in the world economy. The conduct of the war had required the marshaling of various elite groups into the government service-business executives, labor leaders, and academics, among others. After the war ended, some of these lingered behind for a time, working in the treasury and state department or in the White House, on issues of postwar reconstruction. This group shared one common perception: They assumed that if an effective international economic system were to be restored in the world, the United States would have to take the lead in fashioning it.

In ordinary times, that concept might have provoked resistant reactions from the two groups in the political structure of the United States that traditionally constituted the backbone of the special interest organizations, namely, business organizations and labor unions. Exploiting the loose-jointed structure of the U.S. government, these groups could probably have reduced the strength and lessened the clarity of the trade policies that the government was pursuing. But many leaders of labor had been coopted into the highest councils of U.S. government, sharing the heady successes of war with other national leaders; for the time being, they were part of the Establishment, not its adversaries.' Besides, despite the substantial worries of business and labor over the problems of postwar readjustment, the industries that felt genuinely imperiled by the threat of foreign competition were, at the time, fairly limited in number and importance.

The widespread assumption that the United States was the indispensable leader in any movement to reestablish an effective international economic order was, of course, wholly consistent with the economic facts of the immediate postwar period. If the

1. The behavior of business and labor organizations in this period deserves extended analysis that space limitations prevent. In both cases, the leadership for a time took positions that were measurably different from those of their rank and file.




United States presented any problem for the international economic system at the time, it was the threat that its overbearing dynamism might prevent the achievement of an equilibrium in world trade (Kindleberger, 1950). Out of these attitudes and perceptions came the leadership of the United States in sponsoring an International Trade Organization and its offshoot, the General Agreement on Tariffs and Trade (GATT). These same forces were instrumental in generating five large-scale tariff negotiations between 1947 and 1956 that drastically reduced the world's tariff levels.2

The consensus among the U.S. elite during the latter 1940s, imperfect though it was, helped for a while to mask the endemic inability of the government to act consistently in the execution of major policies. But the consensus could not last for long, especially in the field of international trade.3 The Congress, having been charged expressly by the Constitution with con- trolling "commerce with foreign nations . .. and with the Indian Tribes," has always been ambivalent about allowing the president to share in that power, even when international negotiation was obviously necessary to put the power effectively to work. Accordingly, throughout the period from 1948 to 1962, Congress was at pains to insist that the country's participation in the GATT had no standing in its eyes. Moreover, Congress was careful to circumscribe narrowly the president's power to alter U.S. tariff rates; that authority was doled out for periods of a few years at a time and was limited in scope by various precise formulas. As for nontariff trade barriers embodied in U.S. law, the president was given no power whatever to alter such restrictions in the pursuit of international agreements.

Where trade policy was concerned, therefore, the president was in a poor position to resist all the demands of Congress. As one special interest group after another established a support point in Congress, escape clauses were legislated on their behalf. As the years went on, these clauses grew in scope. Worse still, in an effort

2. Historians have observed the striking similarities between the U.S. position during this postwar interlude and the position of the United Kingdom a century earlier (see Semmel, 1970; also Smith, 1981).

3. The paternalistic attitudes of the U.S. leadership, as well as the early signs of an unravelling of the consensus, are reflected vividly in Commission on Foreign Economic Policy (1954).




to head off such congressional initiatives, the president found himself adopting actions from time to time that were flatly at variance with the principles he was so earnestly proposing to other countries. In 1956, for instance, the U.S. chief executive compelled Japan to restrict "voluntarily" its exports of textiles to the U.S. market, a measure grossly inconsistent with the spirit of the GATT. Incidents of this sort were sufficiently frequent in the latter 1950s that the underlying continuities in U.S. policy could easily be missed.

INTERDEPENDENCE A ND A MBI VALENCE AFTER 1962

The commitment of the U.S. body politic to the concept of open markets and nondiscriminatory treatment in world trade survived the 1950s, but the support for that commitment meanwhile underwent some critical changes. By 1962, the leadership role of the United States was beginning to be questioned. The American dollar was no longer quite so impreg- nable. The country's exports still exceeded its imports, but the trend had grown uncertain. At the same time, high levels of foreign aid and foreign military expenditures were adding to the burden of the dollar.

More important was a decline in the relative importance of the U.S. economy. Between 1950 and 1960, U.S. exports dropped from about 50% of the exports of all advanced industrialized countries to less than 25% of the group's total. Further, the European Economic Community (EEC) was emerging as an economic unit equal to the United States in aggregate output and in exports. The possibility that European and Japanese producers might reduce the technological lead of American industry began to be realized.

To be sure, the birth of the EEC could be viewed as a logical outgrowth of U.S. postwar policy, a triumph of the country's efforts to strengthen Europe as a political and economic unit. But the EEC treaty, negotiated under French leadership in the latter 1950s, was wholly a European product. Psychologically, it drew part of its strength from being viewed by many Europeans as a




counterinfluence to the United States in Europe. In matters of trade, it was based on the principle of preferences, not of nondiscrimination. It presented the prospect of an agricultural policy that would displace U.S. farm exports in favor of French and German products. Moreover, it contemplated a tariff system that would handicap any goods manufactured in the United States that might be competing for European markets against other European sellers. The brief period of U.S. hegemony over Europe, it was evident, was rapidly coming to a close.

After 1962, the continuation of trade liberalization policies by the United States, therefore, could no longer be attributed quite so strongly to the imperialist percepticns of its leadership and its related concern for the global system as a whole. Instead, continuation rested to a considerable extent on a growing perception in some quarters of the United States that a return to protectionism in world markets would harm their immediate interests. In 1950, U.S. merchandise exports had amounted to only 6.2% of the final sales of U.S. goods. By 1960, the figure had risen to 7.6%. In later years, it was destined to grow to much higher figures-for instance, to 9.1% in 1970 and 19.1% in 1980. Part of the rise, to be sure, could be attributed to the growing export of agricultural products. But with such products excluded from the export totals, the relative importance of the remaining exports still rose rapidly between 1950 and 1980, growing from 4.5% to 12.7% of final sales of U.S. goods.

Most significant of all, perhaps, was the rapid multination- alization of U.S. firms. In 1957, the foreign manufacturing affiliates of firms in the United States had recorded sales amounting to less than 6% of all the country's shipments of manufactured products; but by 1965, the figure was above 9% and in 1976, would rise to 18%.4

Of course, firms that develop a multinational structure cannot automatically be counted on to throw their weight against protectionism. Some multinationals prefer open markets for their international operations, especially those that have adopted a

4. Calculated from various published studies of the U.S. Department of Commerce. For evidence of the link between multinational structure and international transactions see Vernon (1971: 16).




strategy of scattering the production of their required com- ponents and intermediate products across a number of different countries. Other multinationals, however, rely on high import duties or on other import restrictions to protect their foreign subsidiaries; this is particularly the case, for instance, for subsidiaries that are producing for markets in developing countries. Still, the industries that have been most consistently protectionist in outlook, notably textiles and steel, have been dominated by national, not multinational, firms. Moreover, there is some direct evidence that multinational enterprises as a group tend to give greater support to a regime of open world markets than would national firms similarly situated (Hedlund and Otterbeck, 1977: 155-162; Perlmutter, forthcoming).

Nevertheless, despite the growth of multinational enterprises in the U.S. economy, individual industries in increasing number have pushed for some form of special protection for their products. The number of escape clause investigations completed by the U.S. Tariff Commissioni (now the U.S. International Trade Commission) reflected those increased pressures, rising from two or three per year in the 1960s to twelve in 1976 and thirteen in 1977.5 The quickened tempo of protectionist efforts appeared also in an increase in petitions to secure countervailing, or antidumping, duties on imports, as well as in the increased number of special trade bills before the Congress.

Despite the growing obstacles, the general direction of U.S. trade policy has been maintained. However, with each renewal of the legislation that authorized the president to alter U.S. tariffs as a result of international negotiations, a succession of ingenious provisions has been added that increases the capacity of interest groups to secure special consideration (Balassa, 1978: 409-436). So far, to be sure, these provisions have not been very effectively exploited. Ironically, foreign exporters and U.S. importers associated with them have been learning how to use the loose- jointed structure of the U.S. government and its elaborate system of checks and balances in their efforts to block the initiatives of the groups seeking import restrictions. One careful study of Latin American disputes over the past fifteen years suggests that more

5. From annual reports of the U.S. Tarift Commission and the U.S. International Trade Commission.




than half of those initiatives have been blocked or substantially compromised (Odell, 1980: 207-228).

Still, domestic industries continue to look for ways to increase their ability to threaten or block foreign imports; indeed, with the enactment of the 1979 Trade Act, so many devices of this sort have been created as to raise serious questions about whether the main lines of United States trade policy can still prevail.

The Policies of Other Countries

The decline in the leadership position of the United States has left a vacuum. Neither the New International Economic Order of the developing countries, nor the network of trade agreements spawned by the Europeans, nor the growing strength of the Japanese offers much promise of filling the leadership role.

THE DEVELOPING COUNTRIES

Throughout the past three decades, the developing countries of the world have resisted the blueprint for an open world trading system epitomized by the GATT. Instead, the developing countries have been groping for some alternative, so far not very well specified, that would curb the political and economic power of the advanced countries and more fully reflect their own interests.

Nevertheless, because the United States and other advanced industrialized countries saw themselves at first as shaping a world trading system, they were eager to include the developing countries in any global trade organization, even if the commitments of those countries, for the time being, were trivial or nonexistent. Various exemptive clauses in the GATT, when applied in combination, effectively relieved developing countries of any significant trade-liberalizing obligations. In practice, even when a developing country applied discriminatory or restrictive trade measures in obvious violation of the GATT's provisions, no serious efforts were made to enforce the agreement. At the same time, having opted out of their GATT obligations, the developing countries had no real influence over the pace and direction of negotiations in the GATT. Nevertheless, as the




advanced industrialized countries progressively reduced their tariffs and other import barriers in successive rounds of negotiations, the nondiscrimination clauses of the GATT served to ensure that the liberalization measures were extended to the developing countries as well (Balassa, 1980).

The developing countries made numerous efforts to generate trade commitments among themselves that would lie alongside the network of GATT commitments. But none of these projects made much of a mark (Business International Corp., 1977; Hazlewood, 1979; Abangwu, 1975; and Ramasaran, 1978). The only trade-liberalizing undertakings sponsored by the developing countries that were successful in any substantial degree were projects that extracted special trade concessions from the advanced industrialized countries (Spero, 1981: 197-216). One such undertaking was the so-called Generalized System of Preferences sponsored by the UN Conference on Trade and Development (UNCTAD).

Still, as industries in the developing countries have grown and matured, some of these countries have shifted their trade policies toward the encouragement of exports. As part of that shift, the early propensity of most of these countries to restrict imports without limit has given way to a more eclectic approach. At the same time, however, the attachment of developing countries to the GATT continues to be tenuous and equivocal, more akin to the role of observers than of committed participants. Accord- ingly, when developing countries have taken steps toward trade liberalization, these have been the result mainly of their unilateral decisions, not of commitments under the GATT. For the present, there is nothing in the offing to suggest that the developing countries will prove willing to accept new obligations in world trade.

THE EUROPEANS

Europe's relationship to the GATT system has always been more ambivalent and reserved than that of the United States. The success of the first few tariff negotiations under the GATT,




undertaken soon after the end of World War II, said very little about the real attitudes of Europeans toward trade liberalization. These early negotiations were being conducted at a time when the United States was helping to finance the recovery of Western Europe, and when import licensing, rather than tariffs, was the means by which most European countries controlled imports.

By the early 1960s, however, the European Economic Com- munity had come into existence. Its six original members were in the process of creating the customs union and common agricultural policy that were the core of the arrangement. From that time forward, two things became clear. The European Com- munity would pursue a trade policy that was much more eclectic than that of the United States, highly liberal in some sectors and highly protectionist in others. And in that context, despite the participation of its members in the GATT, it would feel free to deviate from the principle of nondiscrimination to any extent that its interests required.

As far as most European states were concerned, they had little choice during the postwar period but to maintain open borders with respect to a considerable part of their trade. Under the benign influence of the European Recovery Program following World War II, these countries had managed to develop extensive economic ties with one another, reflected in extraordinarily high levels of foreign trade. The eclectic quality in their trade policies, however, stemmed from the fact that their interest in maintaining open borders was based heavily on parochial or regional factors rather than on global considerations.

According to conventional wisdom, the survival of the Com- munity rests mainly on a critical bargain between Germany and France (Curtis, 1965: 23, 194-200; Marjolin, 1981: 36-54). One element in that bargain is an undertaking to create a highly protected area for agricultural products, in deference to France's aspirations to displace North America from the grain markets of Europe; the other is an undertaking to follow a liberal trade policy with respect to manufactured goods, in accordance with Ger- many's desire to push its products in world markets. That basic element of the original bargain seems to have persisted through the decades of the 1960s and 1970s.




Another set of forces has been operation to keep the European community on a liberal trade course, namely, the intimate linkages of its members to various sets of countries outside the community. The French, for instance, have been eager to maintain close ties to three groups of countries outside the Community: the francophone states that once were French colonies or protectorates, other Mediterranean countries that might fit into the mare nostrum strategy that France has been interested in pursuing, and, finally, the oil-exporting countries of the Middle East. The British have had similar interests with regard to some of their own ex-colonies. And both countries, joined by Germany and the Low Countries, have been eager to encourage the peaceful democratic development of the weaker European states, notably, Spain, Portugal, Greece, and Turkey.

The upshot has been that consistency of principle has been much less important in the trade policies of the Community and its member states than in the policies of the United States. The preoccupations of the various EEC member countries have produced some specific responses, such as a national quota, or a preferential bilateral trade agreement, or a multilateral conven- tion with developing countries. When they have decided that it was in their interest to apply restrictions on imports from any source, such as Japan or Korea, they have been quite uninhibited in choosing the form and fixing the level of the restrictions.6 Not all of the trade measures, however, have been restrictive; some have been trade liberalizing in the sense that they have displaced internal production with the products of their outside trading partners. But throughout, the approach of these countries has been eclectic, without substantial commitment to any overall global policy.

The United States has also been indifferent to its GATT commitments from time to time; but on the whole, it has been more careful than Europe in trying to preserve the forms of adherence to these commitments.7 Early U.S. efforts to slow down other countries' exports by demanding "voluntary" export restrictions were motivated in part by the desire to avoid a formal

6. For a description of measures taken in the 1950s and early 1960s, see GATT (1966: 79-84). For later periods, see Hanabusa (1979: 3).

7. For a revealing indication of important if sometimes subtle differences in the approaches to the Europeans and the United States, see Perlow (1981: 93-133).




breach of the GATT. Moreover, U.S. authorities have generally set such restrictions at levels that were not extraordinarily restraining and have not gone to any great lengths to block some obvious channels for evasion. Although I am not aware of any systematic studies on the point, it is widely assumed that these measures have been substantially less restrictive than those of Europe.

These differences in style between the United States and Europe reflect differences in their patterns of governance as well as differences in their perceptions of role. During much of the postwar period, the United States saw itself as a leader of the noncommunist world and saw important advantages in retaining its leadership; Europe, on the other hand, viewed its interests in terms that were much more particularistic and more narrowly defined, and, accordingly, much less concerned with the problems of building and strengthening a global system. This European view persisted into the 1980s, dampening any expectation that Europe would take the lead in any new global initiatives in the trade field.

THE JA PA NESE

Japan's heavy stake in the maintenance of open competitive markets, coupled with the country's growing economic strength, raises the possibility that Japan might assume a leadership role in protecting what is left of the principles of the GATT. But on closer examination that possibility does not appear very strong. Japan's internal political process inhibits it from taking strong initiatives in the foreign trade field. Even if those internal difficulties could be overcome, other countries would find it hard to accept Japan's leadership in any major initiative involving international trade.

Japan began the postwar era with special economic ties to the United States, a relationship first created during the six years of military occupation immediately following World War II. Dur- ing the occupation, Japan faithfully played the role of the subjugated state and ward, adopting without protest a series of radical reforms imposed by the conquering state, including redistribution of the land, creation of a labor movement,




renunciation of the right to rearm, and "democratization" of political processes.8 Meanwhile, the relatively benign U.S. at- titude toward Japan, which rested at first on complex cultural factors, was strengthened by the advent of the Cold War and by hostilities in Korea.

When the occupation ended, the United States continued to act as Japan's guardian and mentor for a little while longer. By 1952, the United States was sponsoring Japan's membership in various international bodies, notably including the GATT, the Interna- tional Monetary Fund, and the World Bank. And in 1964, the United States promoted Japan's membership in the Organization for Economic Cooperation and Development (OECD).

Although Japan was admitted into various global organizations in the two decades following the end of the war, a number of countries continued to look on Japan's performance in world markets with special misgivings. In the 1950s, European countries were slow to end their discrimination against Japan's goods, despite Japan's adherence to the GATT (Hanabusa, 1979: 2-3). The U.S. government's pressure on Japan to restrict "'voluntarily" the export of some of its textile items is well known.

Japan's early experiences, therefore, were hardly calculated to inspire confidence in the GATT system. At first, Japan's adherence to the GATT did not force any major changes in the country's own trading practices. In 1955, as part of the GATT procedures, Japan agreed to a substantial reduction in its tariff levels; but being in balance-of-payment difficulties at the time, Japan continued for some years thereafter to maintain high import restrictions and to discriminate among its trading partners. It was not until the early 1960s that Japan found itself faced with strong demands from other countries to reduce its restrictions on imports and investments.

As these pressures continued during the 1960s, Japan repeatedly pointed to three factors to justify its policies: the continued vulnerability of its economy deriving from heavy dependence on foreign raw materials and foreign markets, which required a cautious step-by-step approach to world trade; the deliberate nature of Japanese decision making, which required

8. The strong cultural factors that allowed the United States and Japan comfortably to assume their respective roles are nicely summarized in Destler (1976: 114-119).




extensive discussion in the bureaucracy and the building of consensus between the bureaucracy, the political parties, and the affected business interests; and, finally, the ineptitude and lack of effort of foreign investors and traders in overcoming the bureaucratic and commercial barriers that remained in Japan (Tasca, 1980: 21-92; Hanabusa, 1979: 16; Japan-United States Economic Relations Group, 1981: 54-69).

Some students of the Japanese economy have stressed other factors that might account for the seeming lack of success of western traders and investors in Japan's economy. Among them was the structure of the Japanese distribution system; for example, wholesalers were often bound to their manufacturers by ties that precluded their switching to foreign sources of supply (Amaya, 1978; Yoshino, 1975: 39). Another factor was Japan's remarkable capacity for blending public and private initiatives in ways thought to add substantially to the competitive power of the private sector.

The extensive interaction between Japan's public and private sectors has been based on a long-standing national conviction that substantial official guidance is needed to achieve the state's social objectives (MITI, 1971, 1980). That guidance is expressed in much richer and more complex interrelationships than those ordinarily encountered between the two sectors in the West.9 For instance, under the leadership of the Ministry of International Trade and Industry (MITI), the government is in a position to inspire and support various key projects carried out by private enterprises that affect Japan's position in international trade. It does this through a wide variety of mechanisms: providing seed money for important research and development projects, providing industrial credits on favorable terms through the Japan Industrial Bank and other specialized credit institutions, organizing and financing leasing arrangements to facilitate the sale of new capital goods, organizing and financing buying consortia to reduce the cost of imported products, and, especially where the Japanese purveyors of goods of services are publicly owned enterprises, developing schedules of prices that contribute to the strength of Japan's export industries.

9. For illustrations of the depth and complexity of these relationships, see Johnson (1978: 125-133) and Caldwell (1981).




For the most part, the relatively naive provisions of the GATT, largely framed against a background of U.S. trade practices, are practically silent with regard to policies as complex as those pursued by the Japanese. At the same time, it has been evident that any country that can apply such policies with a high degree of efficiency is in an advantageous position in a GATT- regulated world.

By the 1970s, Japan had obviously succeeded, for the time being, in overcoming the obstacles that lay in its way for securing needed raw materials and penetrating foreign markets. Ac- cordingly, the state was gradually becoming convinced that it must support an open competitive market system. '0 Moving at a rate that often seemed maddeningly glacial in the eyes of other governments, Japan formally suspended most of the licensing requirements and other special restrictions that had previously encumbered the importation of foreign goods and the investment of foreign capital. "I By 1982, the government was engaged in an ambitious process of dredging out some especially resistant practices, such as the use of elaborate inspection schemes, meticulous classification systems, and forbidding health and safety requirements that were serving to block the importation of foreign products (Anonymous, 1982: 6, 10-13).

A considerable debate continues over whether a system of informal restrictions still exists in Japan that tends to reduce the liberalizing effect of the official measures. But there is no doubt that a major change in Japanese practices had in fact occurred. The movement was all the more significant because Japan continued to be the target of discriminatory trade measures, as embodied in "voluntary export agreements" or in overt import quotas on the part of several important countries, including the United States and various European states.

The oil crisis of the past decade has threatened Japan's support for an open trading system but has not reversed it. In light of

10. Numerous studies exist on trade disputes between Japan and other countries, analyzing such disputes from the differing viewpoints of the various disputants. In addition to Tasca (1980) and Hanabusa (1979), see, for instance, Weil and Glick (1979) and U.S. Controller-General (1980).

1 1. The relatively unrestrictive character of Japan's formal system of trade restrictions is suggested by data in Cao (1980: 97).




Japan's perceptions of its special vulnerability with respect to raw materials, its reaction to the oil crisis was bound to be strong and singleminded. In the late 1960s, even before the crisis had surfaced, the Japanese government was already beginning to ask itself whether the country could afford to rely quite so heavily for its crude oil requirements on the foreign-owned multinational oil companies. The oil crises of 1973-1974 and 1978-1979 weakened the position of those companies and gave Japanese refiners the opportunity to deal directly with the state-owned enterprises of the oil-exporting countries (MITI, 1980: 12). This response inevitably has had implications for Japan's more general trade policies, including its adherence to what remains of the GATT system. In an effort to diversify its sources of supply, Japan has been diligently attempting to expand its trade with China and the USSR. Moreover, it has been developing government-to-government arrangements in raw materials with Mexico, Iraq, and other countries. Such arrangements implicitly encourage preferential dealings between the parties concerned.

As in the case of a number of other countries, including France and Germany, Japan thus finds itself in a position of trying to live within two quite distinctive systems of trade. So far, fortunately, the inherent contradiction between the GATT-sponsored system and the system of government-conducted trade has not reached very significant proportions. If it does, the market economies may have to consider jointly how the two systems of trade can be reconciled; otherwise, what is left of the principle of nondiscrimination in trade will be imperiled.

In any future negotiations over the direction of the world trading system, Japan is likely to support the continuation of an open trading regime, fearing that any other regime would make it the target for more flagrant discriminatory measures. But Japan's concern with the vulnerability of its economy will inhibit it from making strong commitments in any direction and hence limit its capacity to play a leadership role. At the same time, however, Japan is likely to be less passive and acquiescent in multilateral negotiations than it has been in, the past (MITI, 1980). In recent years, some Japanese commentators have questioned whether Japan should continue to follow a "tradesman's policy," that is to




say, a policy of accommodating to all economic pressures without responding to any principles other than survival itself (Amaya, 1980; Sase, 1980; Nukazawa, 1980). These discussions may eventually bring Japan's role in the shaping of a new international regime more into line with her economic power. 12 But for the time being, they will not overcome Japan's deep-seated sense of caution when approaching issues of international trade.

Future Policies

STA R TING A SSUMPTIONS

Robert Marjolin, looking back on thirty years of the evolution of Europe's Common Market, said sadly, "The time for grand designs is over, at least for a while, until circumstances change and the existing order is shaken again" (1980: 77). His observa- tion could apply to trade policies on a global scale as well. For the present, one can only hope to protect and conserve some of the extraordinary openness in international markets that has been achieved in the past three decades. Even to achieve this modest objective, however, will be difficult.

One change that may support the objective is the great increase in the importance of foreign trade and foreign investment interests in the economies of most countries. But it will be imperiled by many countries' increased determination to reduce the impact that the increasing openness of their economies has generated and to limit the rate of adjustment demanded of their industries. In addition, there has been a change in the nature of existing barriers to trade, from relatively transparent tariffs and quotas to less visible subsidies, administrative practices, and procurement policies. Finally, there has been a weakening in the concept of unconditional most-favored-nation treatment as the norm for international trade. I assume these trends will not be

12. Illustrations of the new quality of Japanese participation in global economic issues are found, for instance, in numerous documents of the Tripartite Commission, and in the Wise Men's Report, cited above, where Japanese contributors have been increasingly explicit in their stated preferences. See also Hosomi (1978) and Tanaka (1980).




reversed in the 1980s; therefore, they should be viewed as constraints in the formulation of policy for this period.

I make one other critical assumption based on the history outlined earlier. Both the United States and Japan require the action-forcing discipline of a prospective international negotiation in order to maintain an open trading system. Such pressures seem needed to focus the diverse elements in each country on a general policy that transcends narrower group interests. Other- wise, the internal political process in the United States will generate restrictive measures in response to those narrower interests, while the internal process of Japan will produce near immobility.

With these starting assumptions, policymakers in the United States and elsewhere will have to address a series of linked questions: If the content of the global trade agreements of the past no longer suffices, what is the direction in which new agreements should move? If the most-favored-nation principle is losing its force, what is to take its place? And, if the United States is no longer in a position to assert its leadership in the formulation of global trade proposals, what kind of process can be envisaged that will produce such proposals?

SCOPE AND SUBSTA NCE

The direction in which global trade agreements are heading became fairly obvious in the last giant negotiating session of the GATT, the so-called Multilateral Trade Negotiations (MTN) that were complected in Geneva in 1979. With tariffs reduced to toler- able levels, the ascendant problems in the 1970s included the pro- liferation of public subsidies in all their obvious and subtle forms: governments' demands on selected enterprises (usually foreign owned) in their territories that the enterprises should limit their imports and increase their exports, the procurement practices of state entities, and the unilateral application of quotas by import- ing countries.

These problems have prove much more varied, much less transparent, and much more deeply embedded in domestic




programs than the fixing of tariff rates.'3 Accordingly, both the formulation and the enforcement of agreements in these fields are much more difficult than agreements to freeze or reduce existing tariff rates. They demand more trust among the contracting parties and a better fact-finding, conciliating, and adjudicating apparatus than the 100-member GATT can be expected to provide. Not surprisingly, therefore, it has proved impossible to reach agreement on some of these subjects in the GATT context.

Even with appropriate sponsorship, one can anticipate only a limited number of countries reaching agreement on these difficult subjects. The complexity of these areas is illustrated by the supplemental negotiations that became necessary to implement the 1979 Geneva agreement on governmental procurement. Although the agreement was limited, in the first instance, to a small number of countries, Japan and the United States nevertheless found it necessary to elaborate the agreement in much -greater detail for its application between them (Yoshimo, 1981: 75-77). Until many other governments widen the circle byjoining in-a most unlikely development-the government procurement code establishes preferential rights within a small group of countries.

The question raised by this illustration is whether or not we have reached a point at which selective discrimination may generate more open international markets than the rule of nondiscrimination could produce. In some circumstances, as the rules of the GATT recognize, this may well be the case. GATrs tolerance of customs unions, free trade areas, and similar preferential arrangements acknowledge this point; although arrangements of this sort sometimes have the effect of diverting trade from efficient outside sources to less efficient inside sources, they are justified since they reduce the level of protection among the participants themselves.

Understandably, however, some members of the GATT, including Japan and the United States, have resisted the possibility of a more uninhibited recognition of the right of GATT

13. For a description of export credit programs illustrative fo these points, see The Economist (1981: 78).




members to apply discriminatory trade measures, especially when these are clearly restrictive.'4 The reasons for American and Japanese hesitation are fairly evident. Even though the United States has violated the rule of nondiscrimination from time to time, it has had trouble envisaging a coherent world trading system without such a rule. From the Japanese viewpoint, the danger of legitimizing restrictive preferences and discrimination in international trade lies in Japan's risk of being the first victim. But both these arguments have been losing their force as preferential arrangements have been proliferating under other names. In a world of second-best choices, international agreements based on the principle of nondiscrimination may no longer be possible on any significant scale; the question then is whether or not international agreements with preferential provisions can be made to produce results that are superior to inaction.

The possibilities for using preferential agreements as action- forcing occasions for trade liberalization are illustrated by the various liberalizing codes that were adopted in the 1979 GATT agreements. But the possibilities are illustrated also by the 1981 imbroglio over Japanese exports of automobiles to the United States. Predictably, the preference of the United States has been to cheat on the GATT's rule of nondiscrimination by forcing Japan to restrain "voluntarily" its exports to the U.S. market. If, instead, the U.S. restrictions on Japanese cars were forthrightly acknowledged, there would also be the possibility of acknow- ledging Japan's right to preferential compensation. For instance, one could envisage a bilateral agreement between the United States and Japan that imposed a temporary restraint on U.S. imports of Japanese cars but that was offset by a temporary preference in the importation of other Japanese manufactured products.

The introduction of extensive preferential provisions in bilateral and multilateral trade agreements among the advanced industrialized countries in the GATT would force a reexamina- tion of various other aspects of the GATT structure, including the

14. The question has been debated repeatedly in the GATT and was the center of an inconclusive negotiation in the recently completed MTN agreements. See Merciai (198 1).




smoldering issue of "graduation." This is the question of whether or not the "newly industrializing countries" of the GATT, such as Brazil, India, and Korea, should now be obliged to assume some of the agreement's obligations in addition to being entitled to its rights (Frank, 1979). It is worth noting that if any group of GATT countries enters into preferential agreements that the developing countries choose not to join, the developing countries will find themselves disadvantaged in the first instance. At the same time, however, if preferential agreements were more widely legitimated, Brazil might still hope for access to the markets of the advanced countries through bilateral agreements. For example, if Brazil failed to adhere to a GATT code, the United States might still exchange equivalent rights and obligations with Brazil in a bilateral agreement.

There should be no illusions about the pattern of trade relations that would emerge from agreements of the sort just described. At times, preferential measures that are liberalizing in nature can be made to endure for a while: Witness the twenty-year record of the European Economic Community. But by and large, preferential measures of trade liberalization that are based on agreements among a limited group of countries risk being restrictive. All that can be said in favor of such measures is that they are superior to the alternative, when the alternative appears to be unilateral measures of restriction. Eventually, a return to a global approach in the development of international trade relations will be indispensible. Meanwhile, the problem is to stem or reverse the threat that inertia, accompanied by piecemeal measures of restriction imposed unilaterally by individual countries, may sharply reduce the openness of international markets.

THE INSTITUTIONAL CHALLENGE

The proposals sketched out above have some profound implications for the U.S. approach to international negotiations on trade matters. One important question is how to keep the GATT itself from moldering away, once the decline of the nondiscrimination principle is so explicitly recognized. Even with that critical principle in eclipse, the GATT organization would




still have major importance by performing some of its traditional functions. It could continue, for example, to provide a forum in which quarreling countries could let off steam over their unsettled trade disputes and could bring in third parties to help com- promise such disputes. And it could provide a ready-made structure for launching large trade initiatives once the time was ripe again for moves of that sort.

Another major issue is internal, namely, the question of the relationship between Congress and the executive branch in negotiating new trade agreements. Even more than in the past, U.S. participation in any international agreement will depend on the willingness of Congress to make the necessary changes in the country's legislation. Some of these changes will consist of amendments to existing trade legislation, which in its present form grants paralyzing powers of litigation and appeal to special interest groups. Other changes will involve new legislation bearing on subsidies, procurement, and other matters.

The needed response, in this instance, is already suggested by experience. In grappling with this same problem, the Trade Act of 1974 incorporated an approach that responded realistically to the existing distribution of powers. In an innovation that was almost revolutionary in nature, ten members of Congress were included as official advisers on a U.S. team charged with negotiating trade agreements. In return, Congress agreed at the outset to tie its own hands in the procedures to be followed when ratifying any subsequent agreement. Congressional deliberations were to be completed within sixty days after receiving the agreements, and substantive amendments to the agreements were to be barred.'5 Since questions of trade policy are inseparable from those of domestic policy, such an explicit sharing of power between Congress and the executive branch seems inescapable.

Equally important is the relationship of the U.S. government to special interest groups that influence trade legislation. Until a few years ago, hundreds of trade association staffs that inhabited the corridors of Washington's Capitol Hill confined their activi-

15. "Trade Act of 1974," Public Law 93-618, 93d Cong., H.R. 10710, January 1975. See also Winham (1979).




ties almost entirely to attempting to block imports. The promo- tion of exports first became an issue as the result of a provision of the 1974 Trade Act, which authorized the president to retaliate against foreign governments that imposed "unjustifiable or unreasonable" barriers against United States exports (sec. 301). It would be a small added step for these interest groups to widen their export-promoting activities; instead of limiting themselves to acting as watchdogs over the "unjustifiable and unreasonable" provision and other restrictive provisions of U.S. legislation, they might conceivably become the galvanizing force for new initiatives to negotiate for the reduction of barriers to U.S. exports. Given the increased importance of exports for the U.S. economy, perhaps that change in perspective can be achieved.

From the U.S. viewpoint, the changes in policy and practice that are proposed here are fairly considerable. The probability that such changes can be achieved is not high, but the alternative is sufficiently threatening to national interests to justify the effort.

Date of receipt of final manuscript: July 15, 1982.

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international trade policy in the 1980s: prospects and problems

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