Reciprocal Trade Agreements Act of 1934

President Franklin Delano Roosevelt signed the Reciprocal Trade Agreements Act (RTAA) into law in 1934. RTAA gave the president power to negotiate bilateral, reciprocal trade agreements with other countries. This law enabled Roosevelt to liberalize American trade policy around the globe. It is widely credited with ushering in the era of liberal trade policy that persists to this day.

Tariff

Tariff

A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....

s in the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 were at historically high levels from the post-Civil War

American Civil War

The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...

 period through the 1920s. In response to the Great Depression

Great Depression

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

, Congress

United States Congress

The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

 accelerated its protectionist policies, culminating in the Smoot-Hawley Act of 1930

Smoot-Hawley Tariff Act

The Tariff Act of 1930, otherwise known as the Smoot–Hawley Tariff was an act, sponsored by United States Senator Reed Smoot and Representative Willis C. Hawley, and signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels.The overall level tariffs...

. The Smoot-Hawley Act was a smorgasbord of high tariffs across many American industries. At the same time, countries in Europe

Europe

Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

 enacted protectionist policies. Many economist

Economist

An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...

s believe that these policies worsened the Depression. The RTAA marked a sharp departure from the era of protectionism

Protectionism

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

 in the United States. American duties on foreign products declined from an average of 46% in 1934 to 12% by 1962.

How the RTAA was Different from Other Trade Agreements

Before the RTAA, if Congress wanted to establish a lower tariff for particular import

Import

The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...

s, it would act unilaterally, taking the foreign country’s tariff rate as fixed. Congress would choose a tariff rate that was either a little higher or lower than the median preferred tariff, depending upon the composition of the Congress. Generally, a Republican

Republican Party (United States)

The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...

 controlled Congress would prefer higher tariffs and a Democrat

Democratic Party (United States)

The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...

 controlled Congress would prefer lower tariffs. Thus, tariffs were chosen based on the domestic politics of the United States. Individual members of Congress were under great pressure from industry lobbyists to raise tariffs to protect them from the negative effects of foreign imports.

The RTAA’s novel approach freed Roosevelt and Congress to break this trend of tariff increases. First, it tied tariff reductions by the United States to reciprocal tariff reductions with international partners. It also allowed Congress to approve the tariffs with a simple majority

Majority

A majority is a subset of a group consisting of more than half of its members. This can be compared to a plurality, which is a subset larger than any other subset; i.e. a plurality is not necessarily a majority as the largest subset may consist of less than half the group's population...

, as opposed to the requisite two-thirds majority necessary for other treaties. Lastly, the president had the authority to negotiate the terms. These three innovations in trade policy created the political will and feasibility to enact a more liberal American trade policy.

Reciprocity

Reciprocity (international relations)

In international relations and treaties, the principle of reciprocity states that favours, benefits, or penalties that are granted by one state to the citizens or legal entities of another, should be returned in kind....

 was an important tenet of the trade agreements brokered under RTAA because it gave Congress more of an incentive to lower tariffs. As more foreign countries entered into bilateral tariff reduction deals with the United States, American exporters had more incentive to lobby Congress for even lower tariffs across many industries.

By giving the President the authority to negotiate these deals, the Congress effectively ceded a part of their power (authorized under US Constitution, Article I, Section VIII) to the executive branch. The President had to consider the aggregate welfare of all Americans, his foreign policy

Foreign policy

A country's foreign policy, also called the foreign relations policy, consists of self-interest strategies chosen by the state to safeguard its national interests and to achieve its goals within international relations milieu. The approaches are strategically employed to interact with other countries...

 priorities, and what was feasible with other countries in making his decisions on tariffs. These considerations generally left presidents more inclined to reduce tariffs than the Congress. Whether Roosevelt or Congress foresaw this result is a matter of historical debate.

The Historical Partisan Divide Over Tariffs & the RTAA

After the Civil War, Democrats were generally the party of trade liberalization, while Republicans were generally for higher tariffs. This pattern was clear in congressional votes for tariffs from 1860 until 1930. Democrats were the congressional minority in the majority of Congresses between the Civil War and the election of Roosevelt. During their brief stints in the majority, Democrats passed several tariff reduction bills. Examples include the Wilson-Gorman Act of 1894

Wilson-Gorman Tariff Act

The Revenue Act or Wilson-Gorman Tariff of 1894 slightly reduced the United States tariff rates from the numbers set in the 1890 McKinley tariff and imposed a 2% income tax. It is named for William L. Wilson, Representative from West Virginia, chair of the U.S. House Ways and Means Committee, and...

 and the Underwood Tariff Act of 1913. However, subsequent Republican majorities always undid these unilateral tariff reductions.

By the Great Depression, tariffs were at historic highs. Members of Congress commonly entered in informal quid pro quo

Quid pro quo

Quid pro quo most often means a more-or-less equal exchange or substitution of goods or services. English speakers often use the term to mean "a favour for a favour" and the phrases with almost identical meaning include: "give and take", "tit for tat", "this for that", and "you scratch my back,...

 agreements where they voted for other members’ preferred tariffs in order to secure support for their own. At no point did anyone take into account the aggregate toll on American consumer

Consumer

Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...

s or exporters. This practice is commonly referred to as logrolling

Logrolling

Logrolling is the trading of favors, or quid pro quo, such as vote trading by legislative members to obtain passage of actions of interest to each legislative member...

. President Roosevelt and key members of his administration were intent on stopping this practice.

Though Democrats voted for trade liberalization far more often than Republicans, they were not uniform in their preferences. Democrats skeptical of reducing tariffs during the Depression included Representative Henry Rainey (D-IL) and members of Roosevelt’s own administration – Rexford Tugwell

Rexford Tugwell

Rexford Guy Tugwell was an agricultural economist who became part of Franklin D. Roosevelt's first "Brain Trust," a group of Columbia academics who helped develop policy recommendations leading up to Roosevelt's 1932 election as President...

, Raymond Moley

Raymond Moley

Raymond Charles Moley was a leading New Dealer who became its bitter opponent before the end of the Great Depression....

 and Adolf Berle. However, the administration decided to take advantage of having a Democrat controlled Congress and Presidency to push through the RTAA. In 1936 and 1940, the Republican Party ran on a platform of repealing the tariff reductions secured under the RTAA. But when they won back Congress in 1946, they did not act to remove the tariffs. In the years since the enactment of the RTAA in 1934, the economies of Europe

Europe

Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

 and East Asia

East Asia

East Asia or Eastern Asia is a subregion of Asia that can be defined in either geographical or cultural terms...

 had been decimated by the violence of World War II

World War II

World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

. This left a huge global production vacuum that was filled by American exporters. In the World War II period, the United States had its highest positive account balance in its history. Republican preferences for tariffs started shifting as exporters from their home districts began to benefit from increased international trade

International trade

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

. By the 1950s, there was no statistically significant difference between Republicans and Democrats on tariff policies. This change has endured to the present day.

The Durability of the RTAA

Another key feature of the RTAA was the fact that if Congress wanted to repeal a tariff reduction, it would take a two-thirds supermajority

Supermajority

A supermajority or a qualified majority is a requirement for a proposal to gain a specified level or type of support which exceeds a simple majority . In some jurisdictions, for example, parliamentary procedure requires that any action that may alter the rights of the minority has a supermajority...

. That means that the tariff would have to be especially onerous and that the Congress would have to be especially protectionist. Once enacted, tariff reductions tended to stick.

As more American industries

Industry

Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...

 began to benefit from tariff reductions, some of them began to lobby Congress for lower tariffs. Prior to RTAA, Congress was mostly lobbied by industries seeking to create or increase tariffs to protect their industry. This change also helped to lock in many of the gains in trade liberalization. In short, the political incentive

Incentive

In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...

 to raise tariffs decreased while the political incentive to lower tariffs increased.

How RTAA Changed the World

As American duties dropped off dramatically, global markets also increasingly liberalized. World trade expanded at a rapid pace. The RTAA, though a law of the United States, provided the first widespread system of guidelines for bilateral trade agreements. The United States and the European nations began avoiding beggar thy neighbour

Beggar thy neighbour

In economics, a beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.- Original application :...

 policies (which pursued national trade objectives at the expense of other nations). Instead, countries started to realize the gains from trade cooperation.

Led by the United States and the United Kingdom

United Kingdom

The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

, international cooperation flourished and concrete institutions were created. In talks begun at the Bretton Woods Conference of 1944, the International Monetary Fund

International Monetary Fund

The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

 was created. By 1949, the first international board governing trade, the General Agreement on Tariffs and Trade

General Agreement on Tariffs and Trade

The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...

 (GATT) was established. In 1994, GATT was replaced with the World Trade Organization

World Trade Organization

The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

 (WTO), which oversees international trade agreements today.

The US State Department also found good use of the expansion of free trade

Free trade

Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 after World War II

World War II

World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

. Many in the State Department saw multilateral trade agreements as a way to engage the world in accordance with the Marshall Plan

Marshall Plan

The Marshall Plan was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948...

 and the Monroe Doctrine

Monroe Doctrine

The Monroe Doctrine is a policy of the United States introduced on December 2, 1823. It stated that further efforts by European nations to colonize land or interfere with states in North or South America would be viewed as acts of aggression requiring U.S. intervention...

. US trade policy became an integral part of US foreign policy. This pursuit of free-trade-cum-diplomacy

Diplomacy

Diplomacy is the art and practice of conducting negotiations between representatives of groups or states...

 intensified during the Cold War

Cold War

The Cold War was the continuing state from roughly 1946 to 1991 of political conflict, military tension, proxy wars, and economic competition between the Communist World—primarily the Soviet Union and its satellite states and allies—and the powers of the Western world, primarily the United States...

, as the United States competed with the USSR for relationships around the globe.

Controversies

Today, the WTO attracts crowds of protesters every time it convenes. Opposition to globally structured free trade agreements is strong. Opponents of free trade contend that multinational corporation

Multinational corporation

A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...

s can cherry pick regulations across their operations, which may give them an unfair competitive advantage. Also, free trade opponents point out that multinational corporations often receive tax incentive

Tax incentive

A tax incentive is an aspect of the tax code designed to incentivize, or encourage, a certain type of behavior. This may be accomplished through means including tax holidays, tax deductions, or tax abatements...

s that make it difficult for homegrown businesses to compete. Still others believe that globalization

Globalization

Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

represents a colonial style transfer of capital, labor and natural resources from poorer nations to rich nations.