the turbulent decades of the 1970s and 1980sthe 1970s and 1980s f or multilateral trade cooperation,...

7 T he T urbulent Decades ofthe 1970s and 1980s

For multilateral trade cooperation, the 1970s and 1980s were par-ticularly stressful decades. Protectionist sentiment and unilateralaction to shelter speci‹c industries from foreign competition havealmost always been present on the political landscape of everycountry. But such sentiment especially gained strength in theindustrially more established countries in the late 1970s and early1980s, and these countries individually took numerous actions torestrict access to their markets for particular goods or services.Indeed, the protectionist upsurge appeared to acquire such forcethat a growing number of observers expressed deepening fearsfor the viability of the multilateral trade regime. The nadir ofinternational con‹dence in the regime perhaps came in Novem-ber 1982, when GATT convened a ministerial meeting on tradepolicy. In a meeting reminiscent of the trade conferences held inthe 1920s and 1930s, representatives made urgent calls for coun-tries to commit themselves to “standstills” on further protectionistmeasures.1 Such a commitment was seen as the best that could beaccomplished at the time, though it exercised no more restrainton national policies than it had in the interwar years.

Though the fears were understandable, the regime built up bymultilateral trade cooperation survived the stress. There werestrong countercurrents at work below the surface, and despite theadverse economic circumstances of the period, the in›uence ofthose currents was suf‹cient to preserve trade cooperation andeven to revive the forward momentum of trade liberalization.Though the world economy grew more slowly in the 1970s and1980s than it had in the preceding two decades, world trade con-tinued to expand more rapidly than world production (the excep-

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tions being solely the two recession years of 1981 and 1982). In theUnited States, the leading trading nation, exports of goods andservices actually rose over the two decades, from about 5 percentof gross domestic product in 1969 to about 10 percent in 1989. Thedrive behind the search of corporate enterprises for markets andsources of supply was evidently not diminishing. It provided theimpetus for the initiation of two more sets of multilateral tradenegotiations during these decades, the Tokyo Round, whichbegan in 1973 and was completed in 1979, and the UruguayRound, which was started in 1986.

T HE T OKYO ROUNDThough the worst stresses to trade cooperation were not tobecome apparent until the later 1970s, the environment at thecommencement of the decade was hardly auspicious. The UnitedStates was experiencing a recession, and the overvaluation of thedollar not only aggravated the protectionist pressures generatedby recession but also impaired the performance of exports. Presi-dent Nixon responded to the situation with the establishment ofthe Commission on International Trade and Investment Policy,better known as the Williams Commission. When the commis-sion issued its report in 1971, it spoke of a “crisis of con‹dence” inthe international system of trade and payments.2

However, by the time the Tokyo Round was launched in 1973,the U.S. economy was booming, and the overvaluation of the dol-lar had disappeared as a result of the major currency realignmentthat followed abandonment of the Bretton Woods exchange ratesystem.3 Though the boom was succeeded in 1974 by a lengthyperiod of worsened economic conditions in all the industriallymore established countries (as is described more fully in the nextsection of this chapter), the Tokyo Round negotiators werenonetheless able to agree on a further, substantial reduction intariffs. By the time negotiations were completed in 1979, theindustrially more established countries had agreed on reductionsthat brought their average tariff levels on manufactured importsdown to less than 5 percent. Most distinguishing the TokyoRound from its predecessors, however, was the major effort madeto tighten the trade rules of GATT. The round was also notable in

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extending the reach of the principle of national treatment into anew area of domestic policy—namely, government procurement.Both of these departures assumed still greater importance in lateradvances in trade cooperation in the 1980s and 1990s.

The past success of countries in lowering tariffs (which theythen bound themselves not to alter) was the central reason for thenew focus on trade rules in the Tokyo Round. As tariff barrierswere lowered, traders became increasingly aware that nationallaws and regulations relating to trade presented numerous otherimpediments to foreign competition. The more governmentsnegotiated away their power to utilize tariffs for protectionist pur-poses, the more they were urged to utilize these other measures asalternative means of protection. The Williams Commission, inparticular, stressed that American exports were being impededby foreign nontariff barriers. It accordingly proposed multilateralnegotiations to draw up codes of conduct on several practicesdeemed restrictive of trade.

The belief that other countries were using nontariff barriers tofrustrate the effects of tariff reductions was not con‹ned to theUnited States. The Europeans, among others, took exception tosome American practices. The “injury test” that GATT requiredcountries to apply in cases where countervailing duties againstsubsidized imports were being sought was neglected in theUnited States. (The affected industry was supposed to be able todemonstrate that it had suffered signi‹cant injury as a result ofsubsidized imports.) The Europeans also wanted to return toissues raised during the Kennedy Round, when the U.S. adminis-tration had agreed to new rules relating to antidumping dutiesand to methods of customs valuation. (As I mentioned in chapter6, Congress had rejected these changes on the grounds that theadministration had exceeded its negotiating authority.)

Some Rules Are TightenedThe agenda for the Tokyo Round gave a large place to the nego-tiation of codes of conduct on several trade-related practices orprocedures. It made most progress in tackling those barriers thathad their source in the practices and requirements of national cus-

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toms and trade administrations: the methods used by customsauthorities in valuing imports for the purpose of levying duties,import licensing procedures, and the technical requirements thatimports had to meet to satisfy national health or safety standards.4

When duty was calculated on an ad valorem basis, the methodused in valuing imported merchandise was clearly important indetermining the amount of import duty that an importer had topay. The method varied considerably, so the new code establishedrules to introduce greater uniformity. The administration of im-port licensing was another source of dissatisfaction, since customsauthorities could apply licenses in ways that others saw as dis-criminatory. The new code introduced procedures to eliminatethis possibility. Another obstacle facing many imported goods wasdif‹culty in meeting the technical requirements laid down bynational authorities for major categories of products (e.g., electri-cal appliances or pharmaceuticals). The technical standards, themethods of testing, and the systems of certi‹cation could—inten-tionally or not—be effective barriers to imports. The new codesought to ensure that the principles of nondiscrimination andnational treatment would be respected in the administration oftechnical regulations, and it encouraged a movement toward theinternational harmonization of standards and methods.5

Less progress was made in strengthening the unfair-trade rulesrelating to subsidies and dumping; only modest changes wereadopted. In fact, whereas the Europeans wanted a more rigorousapplication of the injury test, the U.S. Congress relaxed the injuryrequirement through the 1974 Trade Act. There was, moreover, asigni‹cant difference of opinion between the United States andEurope on subsidies. The United States complained that Euro-pean governments provided extensive subsidies to individualindustries either directly or through state ownership; the Euro-peans countered that the huge U.S. public expenditure on thearmaments and aerospace industries was, in effect, subsidizing thetechnological research and development that gave Americanindustry its competitive edge. Different beliefs about the appro-priate relationship between the state and private enterprise layclose to the heart of this issue. One side saw subsidies as a legiti-


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mate instrument of state-directed industrial policy, while theother side believed that the state should generally allow the mar-ket to determine industrial performance.

The failure to make progress on antidumping rules occurredfor a more straightforward, political reason. Despite intellectualrecognition that a more rigorous and transparent set of rulesabout antidumping duties was needed to prevent their abuse as aprotectionist measure, governments were reluctant to redraft therules in ways that would restrict their room for maneuver. Pre-cisely the looseness of the rules was politically attractive. Shouldthe demands of industries agitating for protection become politi-cally too burdensome, the loose rules provided governments witha means of placating the industries in a manner consistent withGATT obligations.

Unresolved IssuesFor political reasons, even less progress was made in dealing withtwo protectionist devices that were being resorted to by the indus-trially more established countries: voluntary export restraints andorderly marketing agreements. These measures lay outside therules of GATT and were substitutes for action that could be takenunder the safeguard clause in GATT. This clause required, how-ever, that import restrictions be applied in a nondiscriminatoryway. Primarily for this reason, the industrially more establishedcountries had preferred not to invoke the clause but to resortinstead to action outside GATT rules. In the hope of outlawingthe use of voluntary export restraints and orderly marketingagreements, an attempt was made during the Tokyo Round torevise the safeguard clause to make it an operational alternative.But the attempt foundered on the fact that most of the industriallymore established countries, particularly the EEC, continued toinsist on the freedom to apply import restriction in a discrimina-tory way.

The Tokyo Round failed even more clearly to subject agricul-ture and textiles—two key sectors of merchandise trade—to GATTdisciplines. Both sectors continued to prove highly resistant toopen trade policies. President Nixon, like President Kennedybefore him, had made promises to the textile industry in his 1972

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reelection campaign. The outcome, which had the active supportof European governments, was the conversion of the Long-TermCotton Textile Arrangement into the Multi-Fiber Arrangement.

The United States placed agricultural trade on the agenda ofthe Tokyo Round. While the United States protected some agri-cultural products, such as cotton, sugar, and dairy products, itwanted to open up foreign markets for products in which it had acompetitive advantage, such as wheat and beef. The EEC, how-ever, was wedded to its Common Agricultural Policy, with itshighly protectionist barriers of import quotas and variable levies.For the EEC, the stabilization of rural production and incomeswas politically more important than the liberalization of trade. Inits view, the best way to manage international markets for agri-cultural products was the negotiation of market shares throughsuch means as commodity agreements.

Government Procurement: A Limited Extension of National Treatment

A more positive outcome of the Tokyo Round was the code relat-ing to government procurement. The code required governmentsto abandon the practice of awarding public contracts only tonational suppliers. This marked a signi‹cant new step in tradecooperation, because it took the trade regime beyond the realmof barriers at the border and into the world of internal policies. Itwas an extended application of the idea of national treatment,one that was carried much further in the Uruguay Round. But thecode was also signi‹cant because the industrially more estab-lished countries decided that unconditional most-favored-nationtreatment should not apply to it. Countries that agreed to sign thecode would apply it only to the other countries that had signed it.It was a breach of the principle of nondiscrimination that hadbeen at least formally, if not practically, respected since thefounding of GATT.

Recognition of Preferential Treatment for Developing CountriesWhat the developing countries secured from the Tokyo Roundwas indicative of the dualism in rules and practices that the mul-tilateral trade regime was acquiring. At UNCTAD conferences in


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the 1960s, these countries had won acceptance from a number ofthe industrially more established countries for the proposed Gen-eralized System of Preferences. In the Tokyo Round, the devel-oping countries gained a change in the General Agreement onTariffs and Trade to provide a legal basis for preferential statusunder the GSP. It was understood, however, that over time,developing countries should graduate from their preferential sta-tus and become subject to the nondiscriminatory rules of GATT.

What Did the Tokyo Round Accomplish?Did the Tokyo Round signi‹cantly advance trade cooperation?Viewed in a long-term context, the answer is surely positive. Withthe number of countries participating in the negotiations rising toninety-nine, GATT acquired a more universal character; theindustrially more established countries brought their average tar-iffs to low levels; several rules of conduct were re‹ned or stan-dardized, reducing the scope for arbitrary, unilateral action; andthe principle of national treatment was extended to a new area.Perhaps most important was the shift in focus from past negotia-tions, which had concentrated largely on the negotiation ofroughly equivalent reductions in tariff levels. In the TokyoRound, the new emphasis was on reaching a consensus on com-mon rules; in furthering trade cooperation, countries were nolonger insisting on the careful balancing of reciprocal concessionsas the sole basis for successful negotiations. On the other side ofthe balance sheet, however, was the evidence that the industriallymore established countries remained unwilling to relinquishmore than a modest portion of the considerable freedom theyexercised to take unilateral action against speci‹c imports. Thecompletion of the Tokyo Round by itself thus did nothing toarrest the concurrent erosion of con‹dence in the multilateralregime.

T HE UPSURGE IN PROT ECT IONIST SENT IMENT AND ACT IONCommentators in the 1970s and 1980s put forward a number ofdifferent reasons for the loss of con‹dence in the trade regimeand the upsurge in protectionist sentiment that occurred at thetime.6 Some pointed to the decline in American hegemony that

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followed from the resurgence in economic strength of WesternEurope and Japan; they claimed that with its economic preemi-nence being challenged, American interest in advancing the opentrade regime was diminishing. Others identi‹ed a general ideo-logical shift away from the postwar free trade consensus as coun-tries struggled with the loss of dynamism in economic growth andwith structural weaknesses.7 Critics of state intervention arguedthat the sources of rising protection lay precisely in the reluctanceof governments to expose industries to the market forces thatwould bring about adaptation to changing conditions. Theyapplied this argument particularly to Western Europe, wheremarket rigidities traced to social legislation associated with thewelfare state, especially such rigidities in the labor market, wereseen as generating resistance to adaptation.

Whatever part such reasons may have played, it is clear thatthe main cause of the upsurge in protectionist sentiment andaction lay in the much worsened general economic circumstancesthat the industrially more established countries were contendingwith during a large part of the period. Most signi‹cant was thedeterioration in the levels of general economic activity. For the‹rst time since the end of the Second World War, these countriessimultaneously experienced a serious recession in 1974–75, andtheir subsequent recovery was marred by slow economic growth,higher levels of unemployment, and rising in›ation. AfterOPEC’s second oil price increase in 1979, monetary authoritiessharply restricted the money supply as a counterin›ationary mea-sure, and in 1981–82, the world economy slid into the most severeof the postwar recessions. These conditions bred protectionistdemands by businesses facing contracting markets at home andby workers fearing the spread of unemployment.

Events in the international economy aggravated these conjunc-tural conditions. When the Bretton Woods monetary system col-lapsed in 1973, it was replaced by the unfamiliar arrangement of›uctuating exchange rates. While it was believed (as I discussedin chapter 2) that this arrangement would ease external balance-of-payments adjustments, it was certainly not foreseen thatexchange rates would become subject to wide swings over peri-ods of several years. The consequence for countries was that, at


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times, both their exporting and their import-competing industriesexperienced severe price competition because of exchange ratechanges. The U.S. dollar, for example, rose strongly against othercurrencies in the ‹rst half of the 1980s; its value against the yenincreased by no less than 60 percent between 1981 and 1985. Thisgave added force to domestic producers’ demands for reliefthrough some measure of protection.8

These adverse economic circumstances overlaid the stressesarising from the need of industries to adapt to long-term shifts inglobal competitive advantage. Such shifts, which are inherent in agrowing world economy, took particularly dramatic form in the1970s and 1980s. At that time, Japan was joined by the newlyindustrializing countries of Southeast Asia in achieving extraordi-narily high rates of economic growth and industrial transforma-tion. Their newfound competitive strength—initially in textilesand clothing; then in heavier industries, such as steel, shipbuild-ing, and cars; and latterly in the technologically newest industries,such as consumer electronics and semiconductors—confrontedindustries in the industrially more established countries with freshdemands on their adaptability. That the structural change wasquite rapid is suggested by the rise in the share of total merchan-dise imported into both North America and Western Europefrom Japan and the newly industrializing countries of SoutheastAsia between the 1960s and the 1980s (see table 4). It is not possi-ble to say how well the countries of North America and WesternEurope might have accommodated themselves to the fast-pacedemergence of Japan and other East Asian countries as majorindustrial exporters if the depressed and unstable economic con-ditions of the period had not occurred. But it is clear that theirgovernments’ responses to the actual conditions focused substan-tially on the industries most affected by these structural changes.

A Spate of Additional RestrictionsThough, as members of GATT, the industrially more establishedcountries had bound themselves not to raise their tariffs unilater-ally, they all entered the 1970s with long practice in the use ofnontariff, protectionist measures. The bilateral quotas establishedunder the Long-Term Cotton Textile Arrangement, which be-

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came the Multi-Fiber Arrangement in 1974, stood as outstandinginstances alongside quotas on many agricultural products. MostWestern European countries had also continued to make use ofquantitative restrictions on imports of a number of products (e.g.,cars) since the end of the Second World War. The United States,too, had placed restrictions on particular imports, such as steeland petroleum, at different times and for varying periods.

In the late 1970s and early 1980s, governments opened the›oodgates to a spate of additional restrictions on imports as theyyielded to demands from individual domestic industries. In par-ticular, numerous voluntary export restraints or orderly market-ing agreements were negotiated with exporting countries. Beforethe early 1970s, only a handful of such arrangements had beenknown to exist—aside from those covering textiles and apparel.By the mid-1980s, however, the World Bank counted ninety sucharrangements (see Grilli 1988, 313). In addition, governmentsbegan to make much greater use of their room for discretion ininterpreting and enforcing national trade laws. In the EEC,administrative interpretations of customs rules and procedures,such as rules of origin or local content requirements, were used torestrict imports. A notorious instance was the ruling by theFrench authorities that videocassette recorders could be imported


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TABLE 4. Share of Total Merchandise Imports from Japan andSix Asian Traders in North America and Western Europe

Percent of Total Merchandise Imports

1963 1973 1983 1993 1998

Into North AmericaJapan 7 11.4 14.2 16.2 11.7Six Asian Tradersa 2.4 6.1 10.6 12.7 11.4

Into Western EuropeJapan 0.9 2.2 3.3 4.5 3.6Six Asian Tradersa 1.2 1.5 2.3 4.0 4.2

Source: World Trade Organization 1999, tables II.3 and II.4.Note: If trade among the members of the European Union is treated as intratrade, the shareof trade from the other countries rises dramatically. For example, for 1993, the sharebecomes 12 percent for Japan and 10 percent for the six Asian traders.

aThe six Asian traders include Hong Kong, Taiwan, Thailand, South Korea, Singapore,and Malaysia.

into France only through the town of Poitiers, an inland townmany miles from the nearest port and with very few customsof‹cers (World Bank 1987, 141). Further, provisions in nationaltrade laws relating to unfair trade—where the criteria determiningunfair trade were again a matter of administrative discretion—were extensively employed to deter foreign competition. In theUnited States, for example, where the International Trade Com-mission had previously been asked to investigate no more than atrickle of cases alleging that imports were subsidized or beingdumped, the number of cases investigated soared to well over sixhundred in 1979–85.9 (While a great many cases were ‹nally dis-missed or withdrawn, the of‹cial acceptance of formal complaintsby domestic ‹rms was sometimes suf‹cient in itself to discourageforeign competitors, since cash had to be deposited to cover pos-sible penalties that would be imposed on past trade.)

The rise in protectionist sentiment and action was generalamong the industrially more established countries. Protectionism,at least in sentiment, was probably more strongly expressed in theEEC, which, at the 1982 GATT ministerial meeting, showed morereluctance than others to accept any curtailment of its freedom toexercise administrative discretion or make bilateral arrangements.But the more striking features in the responses of governments inall these countries are the similarities, not the differences. The sim-ilarities are all the more striking when we recall that in certain ofthese countries, the sea change in economic beliefs from faith instate intervention to greater reliance on the private market was‹rst making its appearance. Most date the ‹rst signs of this changefrom somewhere in the late 1970s. David Henderson, for instance,favors 1978 as the watershed year, since the governments of thecountries in the Organization for Economic Cooperation andDevelopment (OECD) then agreed to allow the free market todetermine oil prices (Henderson 1998, 32). Also around this time,the United States, under the Carter administration, was moving toderegulate the air and road transport industries. In 1979, theBritish Conservative Party ousted the Labor Party from power,and Margaret Thatcher’s government began its program of priva-tization. In 1980, Ronald Reagan, another convinced free marketpolitician, was elected president in the United States. In 1982, Hel-

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mut Kohl, a Christian Democrat, took over from Helmut Schmidt,a Social Democrat, as chancellor in Germany. In France, how-ever, the Socialist Party candidate, François Mitterand, becamepresident in 1981. Despite the underlying shifts in economic ideasand beliefs that were already surfacing in some countries anddespite the swings both ways in political leadership, the trade pol-icy responses were everywhere much the same. Governments,whatever their professed ideological positions, responded to theworsened economic conditions with much the same blend ofexpediency and defensive nationalism.

The Industries That Gained ProtectionIt is striking that different countries acted in support of much thesame industries in the 1970s and 1980s. While there were someindustries that gained particular attention in one or the othercountry (e.g., motorcycles and semiconductors in the UnitedStates), the major industries that were successful in winning polit-ical support for protection were common. These included textilesand apparel, steel, cars, footwear, and consumer electronics. Thissimilarity re›ects the fact that industries in both regions wereaffected by the same shifts in competitive advantage that weretaking place as a consequence of the long-term structural changesoccurring in the world economy.

Leaving aside agriculture, which was effectively not part of theGATT regime at the time, the textile and apparel industry andthe steel industry were the most resistant to adaptation.10 In tex-tiles and apparel, the industrially more established countriescooperated in converting the Long-Term Cotton Textile Arrange-ment into the broader Multi-Fiber Arrangement in 1974. Whenthe arrangement was renewed in 1977, Britain and France wereamong the most active members of EEC pressing for consider-ably more stringent terms. For the steel industry in both theUnited States and Western Europe, a similar pattern of quantita-tive import restrictions and market management emerged overthe years.

Faced with the growth of an ef‹cient steel industry in morerecently industrializing countries and with a mature market forsteel products at home, the steel industries in the United States


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and Western Europe experienced recurrent bouts of excesscapacity. By the late 1960s, the United States had already negoti-ated voluntary export restraints with Japan and Western Euro-pean countries, and the latter had done the same with Japan. Inthe face of strong steel demand, the United States allowed theserestraints to lapse in 1974. But when the steel market againbecame depressed in 1977, the Carter administration introducedthe “trigger price mechanism,” and the EEC quickly followed suitwith a similar device. (The mechanism established a “fair value”import-reference price. Imports below that price were subject toprompt antidumping investigation.) The Reagan administrationscrapped this mechanism in 1982, but as the economy was barelyrecovering from recession and as the U.S. dollar continued to riseagainst other currencies, the U.S. steel industry again sought therestoration of quantitative restrictions. As a tactical move, theindustry lodged a slew of cases against European producers, alleg-ing unfair trade on grounds of subsidies or dumping. The EECthreatened retaliation. Despite its free market convictions, theU.S. administration was obliged to negotiate voluntary exportrestrictions with European producers, and the U.S. steel produc-ers thereafter dropped their unfair-trade cases. When the EEC cutits steel imports in 1983 to make room for the output formerlyexported to the United States, the U.S. industry complained thatJapanese exports formerly directed to Europe were now beingdiverted to the United States. The upshot in 1984 was a tightersystem of quotas, covering most exporting countries and admin-istered by the governments of the industrially more establishedcountries on both sides of the Atlantic.11 The managed market forsteel, like that for textiles and apparel, became a semipermanentfeature of international trade policy. It differed, however, fromthe restriction on trade in textiles and apparel, because it man-aged trade among the North American and Western Europeancountries as well as trade between these regions and both Japanand the industrializing, developing countries.

This retreat into semipermanent protection was by no meanstrue of all the industries that won some measure of protectionistsupport at the time. In some industries, adaptation to the under-lying change in competitive conditions was taking place through

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the “internationalization” of production, which gradually sappedprotectionist demands. The response of the U.S. car industry, forexample, was to intensify its strategy of dispersing its productionof car components and car assembly among different countries totake maximum advantage of production cost differentials andmarket proximity; it also entered into alliances with Japanesemanufacturers to bene‹t from their managerial and technologicalstrengths. ( Japanese manufacturers, for their part, set up produc-tion in North America and Western Europe to insure against pos-sible future trade restrictions.) In both North America and WesternEurope, the outsourcing of production by major manufacturers inthe footwear and consumer electronics industries was taking placesimultaneously with campaigns by the same industries to win pro-tection for domestic manufacture of the same products. VincentCable describes how, in Britain, the divided interests of the con-sumer electronics industry between companies seeking to pre-serve the operations of existing plants at home and companiesalready contracting the production of their brand-name productsto manufacturers in Southeast Asia weakened the industry’sdetermination to lobby for protection. As a nice twist, Japanesecompanies that had set up production in Britain joined withBritish companies in seeking protection from external competi-tors. The Japanese access through Britain to other markets in theEuropean Economic Community did not go down well with thelatter’s consumer electronics ‹rms, some of whom were outsourc-ing production to competing manufacturers in other SoutheastAsian countries (see Cable 1983, 209–13). Thus, economic andcommercial forces at work in some industries were causing struc-tural adjustment through the internationalization of production.While protectionist measures may have slowed down the pace ofsuch adjustment, the adjustment eroded the demand for the mea-sures themselves.

A GAT T Wounded but AliveThe turbulent economic events of the 1970s and 1980s put an endto the sense of security and predictability that had marked theeconomic climate of the previous two decades. A heightenedmood of commercial uncertainty and social insecurity in the


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industrially more established countries generated a demand forsome form of action to relieve conditions being experienced bybusinesses and labor, and this demand merged with the ever pres-ent nationalist sentiment to channel much of the politicalresponse into protectionist trade measures. While governmentssince the end of the Second World War had made substantialadvances in establishing rules for the orderly conduct of traderelations, the less benign economic circumstances that prevailedplaced the rules under considerable stress. GATT could notaccommodate nationalist political reactions to the domesticeffects of serious recessions, slower economic growth, wideswings in exchange rates, or rapid structural changes.

Nevertheless, by comparison with the interwar years, when allthese adverse circumstances were also present, multilateral tradecooperation was in much better shape. GATT did not stop theindustrially more established countries from taking unilateral pro-tectionist measures. But these countries did so in ways that, atleast formally, did not break GATT rules; they resorted to theinformal measures of voluntary export restraints or orderly mar-keting agreements and the use—or, better said, abuse—of nationaltrade legislation consistent with GATT. Moreover, in relationsamong themselves, these countries—despite often shrill languageof mutual accusations, threats, and counterthreats—were circum-spect in introducing new, protectionist measures directed againstthe export of manufactures to each other. With the major excep-tion of the steel industry, they did not attempt to negotiate quota-type restrictions with each other, and the number of unfair-tradecases that actually resulted in protectionist measures was quitemodest. In relations among these core countries, GATT rulescontinued to be largely observed, both formally and in spirit.

In trade relations with Japan, the newly industrializing coun-tries of Southeast Asia, and the other industrializing countries ofAsia and Latin America, both the quota-type restrictions and thenational unfair-trade legislation were more frequently employed.It is obvious that by comparison with the bargaining power thatthe EEC and the United States exercised in their relations witheach other, the position of these other countries relative to eitherthe EEC or the United States was weak. From the earliest days of

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textile restrictions in the late 1950s, Japan had become familiarwith the negotiation of voluntary export restraints or orderly mar-keting agreements. These were applied to the steel industry in the1960s. With its military dependence on the United States and itslimited imports relative to its exports in its trade with the EECand the United States, Japan was in a weak position to retaliateagainst discriminatory action. In the later 1970s and early 1980s,as I have already noted, the use of voluntary export restraintsspread to other industries and to other rapidly industrializingcountries in Southeast Asia. Particularly in the trade in steel, otherdeveloping countries elsewhere were also drawn into the net. Pro-tectionist measures under unfair-trade legislation likewise fell dis-proportionately on the developing countries. In the United States,for example, more than one-third of the cases investigated underthe legislation dealing with subsidies or dumping between 1979and 1985 were directed against exports of manufactures fromdeveloping countries (see Destler 1986, 246–341). This number farexceeded their share of total manufactured imports into theUnited States.

Thus, the weaknesses of the multilateral trade regime revealedby the events of the 1970s and 1980s were twofold. First, the rulesof the regime were not proof against nationalist, protectionistaction in times of general economic dif‹culty. Second, the rulespresumed a greater willingness than actually existed on the partof the industrially more established countries to make adjust-ments that would readily make room in international trade for thefast-growing, newly industrializing countries. That the rules wereevaded or abused did not, however, undermine the regime,because the countries most sinned against were individually in aweak bargaining position. These countries had to accept the arbi-trary behavior of their main trading partners. It was not a condi-tion of their trading relations that their trading partners wouldbehave in the predictable and orderly way promised in the rules.

T HE AMERICAN ADOPT ION OF AN “AGGRESSIVE” T RADE POLICYBecause the United States was the leading economic power in the1970s and 1980s, the U.S. response to rising protectionist andnationalist sentiment was particularly important for multilateral


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trade cooperation at that time. Re›ecting domestic political cross-currents, the U.S. response was complex. Besides yielding, oftenreluctantly, to demands for protection from import competition,U.S. administrations took other, distinctly different and even con-tradictory lines of action. Mainly to gain greater access to foreignmarkets, but partly also as a counteroffensive against the protec-tionist drift, the United States initiated two further rounds of mul-tilateral trade negotiations, the Tokyo Round and the UruguayRound. The former has just been discussed, and the latter is thesubject of chapter 9. It is enough to say here that they helped torally commercial interests engaged in foreign trade to the cause ofresisting a retreat from an open trade policy. At the same time,however, the U.S. Congress developed another course of action,which it pressed on successive administrations to follow: a set ofmeasures that sought to penalize other countries that were engag-ing in practices that “unreasonably” or “unjusti‹ably” harmedAmerican trade. These countries were to cease the harmful prac-tices or be penalized for failure to do so.12

The U.S. Congress ‹rst embodied this approach in Section 301of the 1974 Trade Act. Congress gave the president power topenalize other countries that were deemed to be engaging inunfair trade practices; these practices included not only subsidiesand dumping, which were already covered by other sections ofthe Trade Act, but also other practices, such as those arising outof government procurement, restrictive business practices, or theadministration of exchange and import controls. In the TradeAgreement Act of 1979, the procedures under Section 301 weretightened. Never satis‹ed that successive administrations wereapplying the provisions of Section 301 forcefully enough, Con-gress went further in the Omnibus Trade and CompetitivenessAct of 1988. It added provisions, known as “super” 301, thatrequired the president to identify a priority list of unfair tradepractices allegedly used in particular countries that would have tobe eliminated within a speci‹ed time period on pain of retaliatoryaction. It also included a new provision specifying that the failureof a trading partner to recognize the intellectual property rights ofa U.S. corporation or citizen was to be regarded as an unfair tradepractice.

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To some degree, the congressional action was an understand-able expression of irritation with the trade conduct of some othercountries. There is no question that, like the United States, othercountries were often remiss in living up to the trade concessionsand supporting rules that they had agreed to in past negotiations.There is no doubt, too, that the procedures established in GATTfor dispute settlement and enforcement of obligations were weakand often ineffective; countries could with impunity easily delayor even ignore rulings made in GATT. Congress could be seen aslegitimately expressing its frustration with the inadequate meansof enforcement of GATT rules. Section 301 was, in fact, carefullydrafted to be consistent with U.S. obligations under GATT. Othercountries could not claim that the United States was legally over-reaching itself. Section 301 required that the administrationrespect the procedures of GATT in any dispute with anothercountry. It could technically be argued that the United States wasjust asking other countries to abide by their GATT obligations;the other countries had nothing to fear if they behaved correctly.

However, this is too legalistic a view. Other countries resentedthe evident attempt to bring pressure on them through proce-dures established in the U.S. Congress. Though nominally sup-plementing GATT procedures, the acts set up the United Statesas both prosecutor and judge of other countries concerning anyinfractions of GATT rules. These acts singled out individualcountries for particular political and diplomatic attention by theUnited States, and they accordingly invested trade disputes witha broader political signi‹cance. It was, moreover, a one-sidedprocess, since infractions by the United States were obviously notto be included. This appeared as an incipient reversion by theleading trading nation to the unilateral use of power for advanc-ing its own interest. This expression of unilateralism made Sec-tion 301 a threat to multilateral trade cooperation.

This shift in trade policy was not chosen deliberately by U.S.administrations. Successive administrations have sought to de›ectCongress from demanding action to protect import-competingindustries, by channeling its trade legislation into market-openingmeasures; such legislation was ostensibly less damaging to tradecooperation. Moreover, in executing the trade laws, the succes-


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sive administrations have generally been more circumspect thanCongress would have wanted them to be. Though U.S. trade rep-resentatives have generally adopted an aggressive stance in theirpublic utterances about the trade policies of other countries, theyhave been more restrained in their actions.

In practice, the United States has made numerous allegations ofunfair trade practices by other countries under these laws, and ithas sought to have the practices suspended or altered. In a num-ber of the cases raised since the mid-1970s, the United States suc-ceeded in obtaining some accommodating change from its tradingpartner, thus improving market access for the exports of speci‹cindustries or corporations. From a national point of view, how-ever, the quantitative gains in trade appear to have been quitemodest. They pale almost into insigni‹cance when compared withthe gains won through multilateral trade negotiations.13

U.S. administrations in the 1970s and 1980s thus walked atightrope between congressional demands that they act unilater-ally and aggressively and the knowledge that such action attackedthe foundations of multilateral trade cooperation. The U.S. Con-gress, for its part, felt much less constrained by the treaty obliga-tions entered into by past or current administrations. In otherwords, it was less sensitive to the reciprocal nature of trade rela-tions with other countries. In its deliberations, the center of grav-ity moved much closer to the states and electoral districts fromwhich its members came; this was especially true in the House ofRepresentatives where, as Tip O’Neill, a former Speaker of theHouse, so succinctly said, “ all politics is local” (O’Neill 1994).

The more assertive stance of Congress in the 1970s and 1980swas facilitated by the success of reforms within the legislativebody that were quite unrelated to trade. I. M. Destler hasdescribed how a new generation of politicians in Congress in the1970s successfully challenged the concentration of power and thesecretive backroom politics of the old committee system; but insuccessfully decentralizing power and making procedures moreopen, they also made individual legislators more vulnerable topressures from their constituents for protectionist measures(Destler 1986, 59–62). Senator John Danforth observed in 1983,“The small number of experienced Washington players in the

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executive branch and on the Hill who once dominated U.S. tradepolicy have been faced with growing pressure from forces lessknowledgeable or less convinced by our traditional open tradephilosophy” (Danforth 1983, 46). This pressure was another man-ifestation of the tension that always exists between nationalist sen-timent and the necessary constraints placed on it by a functioningand mutually advantageous regime of trade cooperation.

RELAT IONS BET WEEN T HE UNIT ED ST AT ES AND JAPANThe trade tensions that arose in the 1970s and 1980s found theirmost acute expression in relations between the United States andJapan. American dissatisfaction with these relations gave rise to avoluminous ›ow of speeches, articles, and books in whichnational sentiment often won the battle over dispassionate analy-sis. Underlying sources of the explosion of dissatisfaction lay ingeneral economic circumstances discussed earlier in this chapter—poor performance of domestic output and employment,exchange rate swings, and problems of structural adaptation. Butthe particular focus on Japan had additional, more speci‹c rea-sons. Many American multinational corporations felt frustrationfrom having failed to gain a share of the large and lucrative Japan-ese market. It was a high-income market that was second in sizeonly to the United States, but despite some notable exceptions,major industries (e.g., the automotive industry) had succeededneither in penetrating the market with their exports nor in estab-lishing subsidiaries there. Further, in some technologically newindustries, such as the semiconductor industry, which Americancompanies had been the ‹rst to develop commercially, Japanesemanufacturers appeared to be taking the lead internationally. Thebelief was that their success depended, in no small part, on Japan-ese industrial policy. It was alleged that they enjoyed a shelteredmarket at home that not only enabled them to establish them-selves in the ‹rst place but also allowed them to pursue a dualpricing system at home and abroad. Finally, the United Statesbegan to run a huge trade de‹cit in the early 1980s, whereas Japanrecorded a surplus of roughly comparable magnitude. This onlycon‹rmed many people in their belief that while the UnitedStates pursued an open trade policy, Japan did not.14 In the polit-


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ical mood of the time, successive U.S. administrations felt com-pelled to enter into a series of negotiations with Japanese govern-ments, intended to improve access to the latter’s markets.

The historical background to Japanese-American trade rela-tions is of some importance in explaining these developments. Inits years of remarkable recovery and growth from the 1950s to the1980s, Japan pursued a pattern of growth that was strongly exportoriented, and it directed a substantial part of its exports to theUnited States. American manufactures were faced with a com-petitor that was technologically advanced and whose ‹rmsappeared to be superior in their production and managementmethods. The Japanese impact on some U.S. markets was dra-matic. Japanese cars, for instance, increased their share of theU.S. market from 4 percent in 1970 to 21 percent in 1980, and ifsales of cars manufactured in plants opened up in the UnitedStates are included, the share rose to 30 percent in 1989.

The behavior of Japanese imports of manufactures was, how-ever, quite different. Being poor in natural resources, Japan was alarge importer of raw materials, fuel, and some foodstuffs; manu-factures accordingly did not dominate imports as they didexports. Moreover, the intra-industry pattern of trade that hascharacterized relations among the other industrialized countriesappeared weak in the case of Japan; the exchange of highly spe-cialized and differentiated products from within the same indus-try occurred less. While this may have re›ected differences inJapan’s industrial structure, it was taken as further circumstantialevidence supporting the view that there were barriers impedingimports of manufactures into Japan.

These circumstances laid Japan open to the charge that it waspursuing mercantilist policies—taking advantage of open marketsabroad for its exports, but restricting access for imports into itsown markets. In the 1970s and earlier, the blame for the inabilityto gain access to the Japanese market was laid mainly at the doorof familiar trade barriers, initially tariffs and import restrictions,latterly customs rules and administration. But Japan had partici-pated fully in the multilateral negotiations held under GATT, andas its tariffs were reduced to minimal levels and its customs prac-tices were brought into conformity with strengthened GATT

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rules, the diagnosis shifted. Opinion in the United States thencame to see the barriers to trade as arising not at ports of entry butfrom within the domestic economy. They were viewed as beinggenerated by a range of governmental and business practices thatregulated the conduct of commercial affairs in Japan. These wereidenti‹ed in many different speci‹c forms and were asserted toimpede market access for foreign enterprises both through thesale of imported goods or services and through the establishmentof subsidiaries. They ran the gamut from government licensingarrangements or administrative guidance to manufacturers’ con-trol over distribution channels or cross shareholding amongenterprises.15

These internal obstacles to trade and investment lay outsidethe purview of GATT, and the response of U.S. administrationswas to initiate bilateral negotiations directly with Japan. The Mar-ket-Oriented Sector-Speci‹c (MOSS) negotiations of 1985–86were the ‹rst in a series of attempts to reach agreement on theremoval of impediments to competition in particular sectors.16

The Semi-Conductor Trade Agreement of 1986 was a similarattempt to gain for American producers greater access to aspeci‹c sector. Such sector-speci‹c negotiations explored possibleimpediments at a level of great detail and were necessarily tortu-ously slow. They were investigating long-standing governmentaland business practices that were, for the most part, rooted in themarket structure and institutional conditions within which Japan-ese business was conducted, and while structural relations andinstitutional conditions can change, they generally change onlyslowly and in response to internally generated pressures.

In a further attempt to alleviate trade tensions between Japanand the United States, the Structural Impediment Initiative waslaunched in 1989–90. This initiative addressed macroeconomicconditions in both countries, and it countered the popular viewthat Japanese mercantilism was clearly proven by the huge tradede‹cit that the United States ran mostly with Japan and by theequally large trade surplus that Japan ran mostly with the UnitedStates. Though it seemed intuitively correct to many, the tradeimbalances had nothing to do with any differences between theUnited States and Japan in the degree of openness of their


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economies. Japan’s surpluses re›ected the persistent tendency fordomestic saving to exceed domestic investment, leaving a bal-ance to be invested abroad. (In other words, to absorb the earn-ings from exports of goods and services, Japan purchased foreignassets as well as imports of goods and services.) Conversely, theUnited States found domestic saving insuf‹cient to ‹nancedomestic investment and borrowed from abroad, and this capitalin›ow ‹nanced the de‹cit in the trade balance. The solution tothe trade imbalances lay in macroeconomic policies, not in trademeasures. It was hoped that if the imbalances could be reduced,some of the heat might be taken out of the American resentmentstirred up by the persistent trade de‹cit with Japan. The Struc-tural Impediment Initiative also had the advantage that it had anair of reciprocity about it: Japan was to encourage higher levels ofdomestic consumption (and so raise imports and reduce saving),and the United States was to reduce its chronic budget de‹cits(and so raise savings and reduce its trade de‹cit). In 1993, yetanother endeavor was launched in the Framework for a NewEconomic Partnership, which was something of a hybrid arrange-ment containing joint macroeconomic aims as well as sectoraland structural programs.

These bilateral negotiations were viewed by other countries asa possible threat to multilateral trade cooperation. Despite reas-surances by the United States that any concessions made by Japanwould be extended on a most-favored-nation basis, the EECfeared that the United States might gain preferential treatment forparticular goods or services. Thus, in resisting U.S. pressures,Japan had silent allies in other trading partners of the UnitedStates. The larger concern, however, was that the bilateral negoti-ations appeared to signal a loss of con‹dence by the leading trad-ing nation in the effectiveness of the multilateral trade regime.

In sum, the three key elements in U.S.-Japanese trade relationsin the 1970s and 1980s were the success of Japanese manufactur-ers in the American market, the dif‹culty experienced by majorAmerican manufacturers in penetrating the Japanese market, andthe huge U.S. trade de‹cit with Japan. Together, these elementscreated what appeared to be a lack of reciprocity. But since per-ceived reciprocity is the political condition of trade cooperation,

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in its absence, American manufacturers were able to win substan-tial political support for unilateral action against Japan.

The actual commercial bene‹t derived from the market-open-ing measures wrested from Japan by such action appears to havebeen quite limited. After reviewing agreements reached between1980 and 1995, Theresa Greaney found that their effects on actualtrade ›ows were generally modest and that where the effect wassigni‹cantly positive, as in autos or semiconductors, it was some-times so at the cost of trade diversion.17 Individual manufacturing‹rms doubtless bene‹ted substantially, but the gain in foreigntrade for the nation as a whole was slight and was diminished bythe cost of unilateral action in lessening the general trust in multi-laterally agreed rules of conduct.

In the latter part of the 1990s, U.S.-Japanese trade relationsreceded from center stage in Washington, D.C. Certainly, theUnited States and Japan had trade disputes, which one or theother took to the WTO Dispute Settlement Body; certainly, theUnited States continued to press for more market-opening mea-sures, negotiating agreements that set out monitoring andenforcement arrangements for changes in Japanese laws, regula-tions, and practices.18 But in these years when American industryhad entered a period of exceptional economic growth and pros-perity while that of Japan languished, the political concern withthe perceived lack of reciprocity fell away, even though the U.S.trade de‹cit did not diminish.19


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the turbulent decades of the 1970s and 1980sthe 1970s and 1980s f or multilateral trade cooperation,...

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