The four preceding chapters have argued that American trade strategy responded not only to a domestic political logic but to a systemic logic generated by the constraints and opportunities of the international economic structure as well. Despite the country’s low level of dependence on the international economy, large domestic market, isolationist ideology, and permeable political process dominated by domestic pressure groups, the trade strategy of the United States was influenced in important ways by the structure of the international economy. Explanations focusing on domestic politics and processes thus capture only part of the dynamics behind trade strategy. They highlight the role of interest groups and Congress but overlook the importance of the national trade interest and the foreign policy executive.
The constraints and opportunities of the international economic structure facing the United States changed considerably over the period 1887 to 1939. As I attempt to demonstrate in Part II, American trade strategy evolved and, at several points, was sharply transformed in response. In this period, four different international economic structures and, correspondingly, four phases of American strategy can be identified. These phases are summarized graphically in Figure C.1. The placement of the phases in relation to one another is approximate, and therefore represented by broken lines, but the overall pattern is clear.
During the first phase of American trade strategy, from 1887 to 1897, discussed in Chapter 3, the international economic structure of British hegemony and America’s increasing relative labor productivity combined to create an era of opportunity for the United States: Britain’s commitment to free trade remained secure and the United States could easily obtain an opportunist’s first policy preference of protection at home and free trade abroad (P/FT). The United States could both protect its domestic economy and expand its exports, thereby undercutting Britain’s, without fear of retaliation from its principal trading partner. It could, in other words, free ride on free trade.
As a result, the tariff—previously an instrument of protection—was internationalized and transformed into a tool for both protection and export expansion. It continued to protect American industries at home, but under the new, more activist policies of bilateral reciprocity and duty-free raw materials exports to Latin America were also expanded. Between 1887 and 1890, both political parties adopted identical trade strategies despite the severe electoral competition and deep rhetorical differences that divided them. This simultaneous Republican backing for reciprocity and Democratic advocacy of duty-free raw materials is, perhaps, one of the strongest cases of support for the systemic theory developed in Chapter 1.
In the second phase, a new international economic structure of declining hegemony emerged. In approximately 1897, the United States surpassed Great Britain in relative labor productivity, creating a significant change within the international economic structure. Despite this change, Britain remained committed to free trade, thereby creating an incentive for the United States to pursue policies similar to those found in the first phase. America’s increasing relative labor productivity, on the other hand, broadened the country’s export horizons and stimulated a desire for greater access to foreign markets. At the same time, and perhaps because of America’s increasing competitiveness, many Europeans increased their tariff barriers and specifically sought to exclude goods exported from the United States.
Torn between the desire to free ride on Britain and the need to preserve and expand its markets on the Continent, the United States adopted more active but nonetheless protectionist policies designed to differentiate between trading partners. Using first an expanded form of reciprocity in the Dingley Tariff of 1897 and later maximum-minimum tariff schedules in the Payne-Aldrich Act of 1909, the United States maintained protection at home and its policies of export expansion in Latin America while arming itself with the bilateral tools necessary to counter continental trade restrictions.
During the third phase of American trade strategy, from 1912 to 1930, the international economic structure imposed greater constraints on the United States than faced in any other period between 1887 and 1939. In approximately 1912, the United Kingdom evolved from a hegemonic leader into an opportunist, transforming the international economic structure from hegemony into bilateral opportunism. With this structural change, the trade policy preferences of the United States and the United Kingdom became mirror images of each other: the two opportunists could agree to adopt mutual free trade or mutual protection, but they could not simultaneously realize their preferred strategies of protection at home and free trade abroad.
Given the iterative nature of international trade relations, whether two or more opportunists will settle at mutual free trade, mutual protection, or some point in between is determined largely by the level of instability present in the international economy. Instability increases incentives for protection within a structure of bilateral opportunism in two ways. First, opportunists—like all countries—desire stability and will use protection to insulate themselves from international disruptions. Second, instability undermines the ability of opportunists to cooperate in the adoption of mutual free trade by increasing the value of present returns for protection (or defection) relative to the value of future returns for free trade.
Before World War I and under conditions of relative international economic stability, the United States adopted a liberal, freer-trade policy. The Underwood Tariff of 1913 drastically reduced tariff levels and explicitly endorsed the goal of free trade within the international economy. The war, however, created widespread international economic instability. Both the United States and the United Kingdom responded with higher protection, and cooperation between the two opportunists became difficult. The United States compensated for this decrease in liberalism with a more active trade strategy, threatening retaliation for discriminations against American exports and adopting the unconditional most-favored-nation principle.
The fourth phase, from 1930 to 1939, saw a pendulumlike swing in American trade strategy. In approximately 1932, the United Kingdom evolved from an opportunist into a spoiler, creating a second change of the international economic structure from bilateral to unilateral opportunism. The impending transformation of the international economic structure altered the constraints and opportunities facing the United States as early as the late 1920s. Three factors, increasing international economic instability, the forthcoming termination of bilateral opportunism, and the emerging unilateral opportunism all conspired to push the United States toward a strategy of preemptive protection. In particular, these factors reduced the fear of foreign retaliation, important in restraining protectionism in 1913 and 1922; rendered American policy less contingent or interdependent, thereby allowing the tariff to be redefined as a domestic political issue and weakening the foreign policy executive; and prompted tariff increases on agricultural and primary commodities, increasing pressures for protection at all higher levels of processing. Thus the evolving international economic structure created not only systemic incentives for a modest increase in the tariff but also conditions under which congressional logrolling could flourish. The Smoot-Hawley Act of 1930, a highly protectionist and moderately active tariff, was the result.
The Smoot-Hawley Act unleashed a wave of protectionism in the international economy directed, in part, against the United States. As its export markets closed, the United States could once again gain only by exerting a measure of leadership and reversing this trend, which it sought to do through the Reciprocal Trade Agreements Act of 1934. This was an extremely active and potentially liberal amendment to the Tariff Act of 1930 designed to counter the growing trend toward bilateralism in international trade. The United States did not abandon protectionism in the RTAA. Nor did the single opportunist perceive itself as acting in the long-term interests of the international economy. The RTAA was, at least in contemporary American eyes, a complement to protection through which the country could reopen foreign markets. By 1939, the United States had returned to the level of protection it had maintained during the 1920s.
The theory developed here also highlights the importance of the foreign policy executive as the agent that transforms the constraints and opportunities of the international economic structure into trade strategy. In each of the four phases examined here, the major innovations in American trade strategy designed to respond to the changing incentives of the international economic structure were initiated and most forcefully advocated by individuals in positions of authority within the foreign policy executive. The efforts of Presidents Grover Cleveland and Benjamin Harrison and Secretary of State James G. Blaine to internationalize the tariff between 1887 and 1890, President William McKinley’s transformation from a protectionist into an advocate of reciprocity in 1897, President Woodrow Wilson’s push for tariff reform in 1913, and Secretary of State Cordell Hull’s crusade for the RTAA of 1934 are perhaps the clearest examples of trade strategy leadership by foreign policy executives. Yet Presidents Warren G. Harding and Herbert Hoover also played central though perhaps less dramatic roles in the formulation of trade strategy during their respective administrations. Although he appointed strong protectionists to the Tariff Commission, Harding called for restraint in 1922 by raising the fear of retaliation. He also adopted the unconditional MFN principle in 1923. Hoover initiated an appropriate revision of the tariff in 1930 but failed to restrain the protectionists in Congress. Although the foreign policy makers may not have achieved everything they desired, they generally recognized and pursued the national trade interest as derived from the international economic structure (the important exceptions are discussed below). And in most cases the principal objectives of the foreign policy executive were met.
This relative success can be attributed to two factors. Although society and Congress, on one hand, and the foreign policy executive, on the other, consistently possessed different trade agendas and objectives, throughout most of this period little fundamental conflict existed between society’s demand for continued protection and the foreign policy executive’s trade strategy initiatives. As noted in Chapter 2, the actors possessed different but seldom irreconcilable goals. Given Britain’s commitment to free trade, American policy makers could easily reconcile protection with export expansion in the early 1890s. This is only slightly less true for the strategy of protection and market preservation pursued between 1897 and 1912. Likewise, in light of the impending change of the international economic structure, Hoover was generally in accord with the higher protection desired by Congress, although he did not support the final bill. And many members of Congress recognized the need for lowering duties through international negotiations and were willing to follow the lead of the Roosevelt administration in 1934.
Only in the period 1912–30 was there a gap between Congress and the executive which could not be easily bridged. The executive’s desire to reduce tariffs in the first instance, and to moderate revisions in the second, fundamentally conflicted with society’s continued desire for protection. Yet Wilson accomplished his proposed reform despite deepseated congressional opposition. And although the widespread international economic instability created by the war lessened the gap between the interests of the executive and society, Harding nonetheless emerged as the successful advocate of moderation.
Foreign policy leaders were also successful because of the bargaining strategies adopted to a greater or lesser extent by every executive. As argued in Chapter 2, two strategies follow from the executive’s need to penetrate the otherwise closed congressional tariff-making process and the unique position of the foreign policy executive at the intersection of the domestic and international political economies. First, the foreign policy executive can mobilize societal groups with complementary interests into the policy-making process, thereby gaining access to the legislature. This strategy, for example, was effectively used by Blaine in 1890 to mobilize farmers into the tariff-making process for the first time and by Wilson in 1913 to incite his progressive supporters to political action directed at the legislature.
The second strategy is for the foreign policy executive to use its role as the sole authoritative maker of foreign policy to redefine issues and bind the government through international agreements. Cleveland was the first to redefine the tariff debate through his 1887 Annual Message. Nearly every president who followed also highlighted the foreign policy dimension of trade policy and sought to expand the legitimate role of the executive in the trade policy-making process. Blaine effectively used the strategy of international linkage in the first International American Conference to build support for export expansion and reciprocity. Hull, although thwarted by his own president, sought to use this same strategy to build support for the RTAA at the London Economic Conference in 1933*
To highlight the success of the foreign policy executive is not to argue that the individuals involved always and everywhere obtained their goals. Despite his later praise for the Payne-Aldrich Act of 1909, Taft had originally desired a more substantial reduction in the tariff. A smoother transition in policy might otherwise have been expected, but the president’s widely cited political ineptitude most likely contributed to the sharp break in strategy between 1909 and 1913. Similarly, McKinley had staked much of his trade strategy in 1897 on the successful passage and implementation of reciprocity. Subsequent congressional resistance and President Theodore Roosevelt’s acquiescence limited the effectiveness of the assassinated leader’s program. Finally, with a naive faith in the ability of the independent Tariff Commission to determine appropriate duties scientifically, Hoover stoked up the tariff locomotive only to watch Congress overheat the engine and steam off out of control.
In conclusion, American trade strategy did largely conform to the constraints and opportunities of the international economic structure throughout the period 1887–1939; the results are summarized in Table C.1. The theory of international economic structures is supported in seven out of the eight tariff acts passed between 1887 and 1939. The Smoot-Hawley Act, which only partially supports the theory, is the exception. Although the timing and direction of the 1930 tariff bill are generally correct, the magnitude of the upward revision is not predicted by the theory. Even this is partly explicable, however. The changing constraints and opportunities of the international economic structure appear to have acted as a spur to the preexisting congressional propensity for logrolling.
In addition, the foreign policy executive generally pursued the expected role in the policy-making process. Out of a total of ten presidential administrations that had an important bearing on American trade strategy between 1887 and 1939, six confirm the framework set forth in Chapter 2.1 In these cases, the president or secretary of state recognized and actively pursued policies consistent with the constraints and opportunities of the international economic structure. Presidents Theodore Roosevelt and Taft are disconfirming cases. Roosevelt laid the groundwork for subsequent revision, but he allied himself with the protectionist wing of Congress while in office and did not vigorously pursue the policy of reciprocity set forth in the Dingley Act of 1897. Taft appears to have been particularly insensitive to the constraints and opportunities of the international economic structure and, following Roosevelt’s preset course, was outmaneuvered by the protectionists in Congress. Finally, the cases of Harding and Hoover are ambiguous. Harding worked hard to restrain increases in the tariff in 1922 and readily adopted the unconditional MFN principle in 1923. Yet he also appointed staunch protectionists to the Tariff Commission, undercutting the effectiveness of the flexibility provision of the Fordney-McCumber Act. Hoover’s initial call for tariff revision conformed well with the constraints and opportunities of the international economic structure, as did the later advice given him by his secretary of state, Henry L. Stimson. But like Taft, Hoover appeared not to understand the changing systemic constraints confronting him and failed to restrain the protectionists in Congress. Despite these anomalies and ambiguities, however, the results are generally supportive of the theory.
Table C.1. American trade strategy, 1887–1939The case study of American trade strategy also reveals two important and more general limitations of the theory. First, the theory is underdetermining at the level of specific policy choices. This is most clearly revealed in the first phase of American trade strategy discussed in Chapter 3. Although the theory of international economic structures explains the trade strategy adopted by both the Harrison and Cleveland administrations, it cannot explain the specific policies they pursued. In this case, at least two (and perhaps more) policies were consistent with the constraints and opportunities of the international economic structure, national trade interest, and final trade strategy adopted by the United States. Similarly, the theory of international economic structures cannot explain the pattern of protection across industries or sectors. Nor can it explain the rate of protection on a single article over time. Such phenomena are best explained by the interest-group or public-choice approaches discussed in Chapter 2.2
This lack of specificity is shared by other theories in the social sciences. As a rule, the more general the theory, the less specific are its predictions and, hence, explanations. Likewise, the higher the level of analysis from which the theory is drawn, the less detailed and refined are the dependent variables it can explain. This limitation should not, in my opinion, lead scholars to reject systemic-level theories. We should, instead, choose theories appropriate to the question at hand and not expect more of a theory than it can reasonably deliver.
As a second limitation of the theory, the level of protection in the United States between 1887 and 1939 was often higher than in France or Germany, the two spoilers of the system. This raises an empirical anomaly for the theory of international economic structures. Despite their desires for free riding on the hegemonic power and the effects of international economic instability, the theory predicts that opportunists will have a weaker preference for protection than countries of relatively low labor productivity. This anomaly does not, I believe, falsify the theory because the substance, direction, and timing of changes in American trade strategy are still correctly predicted. Rather, it indicates the presence of other factors affecting national trade strategies.
Specifically, two national-level variables appear to be important for explaining the higher than expected level of American protection. The first factor is domestic market size. The smaller the domestic market of a country the higher the opportunity costs of closure and the more likely it is that a country will adopt free trade. This is a central tenet of international trade theory.3 As argued in Chapter 1, moreover, increasing returns protection is more effective in countries with large domestic markets. With the world’s largest Gross National Product in the period examined here, the United States could better afford and gain more from protection than either France or Germany. It could, in other words, more readily give in to protectionist demands from society.
The second factor, discussed in Chapter 3 and incorporated into the conception of the policy-making process developed there, is state structure. This structure conditions the access and influence societal groups have in the policy-making arena. The more decentralized the state, the greater access societal groups are likely to have, and the more likely the policy process will be to respond to societal demands for protection. Both France and pre—World War II Germany possessed more centralized state structures than did the United States. Their comparative insulation from domestic pressures may have enabled them to resist producers’ demands more effectively.4
Despite these limitations and the empirical anomalies summarized in Table C.1, this study provides relatively strong support for the theory of international economic structures developed in Chapter 1 and the framework for understanding the trade policy-making process outlined in Chapter 2. Together they provide a relatively powerful and parsimonious explanation of the substance and changes in American trade strategy during the late nineteenth and early twentieth centuries, the goals and policies pursued by the foreign policy executive, and the principal political cleavages within the trade policy-making process.
As discussed in Chapter 1, American trade strategy during the period 1887 to 1939 approximates a “hard” or least likely crucial case study for the systemic-level theory of international economic structures. The country’s large domestic market, low level of international economic interdependence, isolationist ideology, and permeable political process dominated by domestic interest groups should vitiate the constraints and opportunities of the international economic structure. The explanatory power of the theory in this case suggests that it will also be able to explain, at least in part, other “softer” cases.
The theory of international economic structures, however, has never been intended as a monocausal explanation of national trade strategy and, specifically, American trade strategy. From the outset, I have attempted only to discover how far this one variable could be pursued without presuming that it could explain all or even most of American trade strategy. Clearly, detailed prediction or, more important, explanation requires both better and more refined theory and, ultimately, attention to more than one causal factor. In seeking to move beyond the more simplistic versions of the theory of hegemonic stability, I have emphasized the former task. Before examining the interaction of several independent variables we must first understand their individual effects. This has been the limited ambition of this book.
International and Domestic Explanations
As noted in the Introduction, the dominant explanation of American trade strategy between 1887 and 1939 focuses on interest-group pressures and party politics. The interpretation of American trade strategy presented in Part II, however, raises important anomalies for this approach.
Changes in the export dependence of American industry do not correlate strongly with alterations in tariff levels. The tariff was internationalized between 1887 and 1890, when few industries were export-dependent; here, action by the foreign policy executive clearly preceded societal demands. Export dependence then increased sharply in the 1890s, yet average tariffs remained relatively constant. Conversely, with only a slight increase in export dependence during the first decade of the twentieth century, tariffs were lowered modestly in 1909 and dramatically in 1913. Finally, export dependence and foreign investment increased during the war, but tariffs were actually raised in 1922. In only the Smoot-Hawley Act of 1930 did the export dependence of American industry have the predicted effect: as export dependence declined the tariff was raised. But increased foreign investment may have offset this decline in the expected liberalism of American industry. Perhaps a more disaggregated measure of export dependence would provide stronger support for this approach. And other sectors of the American economy were of obvious importance, but adding agriculture, finance, labor, and consumers only obscures the predictions of the interest-group model even further (see Chapter 2). Competition between the political parties also receives only mixed support as an explanation. It is true that whenever the Democrats captured the presidency and Congress tariffs were lowered, slightly in some cases and more so in others. Likewise, Republicans raised tariffs, with the exception of the Payne-Aldrich Act of 1909. Yet, as is most clearly demonstrated in the early 1890s, significant commonalities in trade strategy existed despite changes in party. And important changes occurred in party platforms over time. The Wilson-Gor-man Act of 1894, Underwood Act of 1913, and RTAA of 1934 are more different than similar; the same holds for the five Republican tariffs passed during this period. Although interest-group pressure and party competition no doubt played important roles in the formulation of American trade strategy, the simple causal relationships typically posited in the existing literature appear inadequate.
Two debates have been central to the fields of political science and international political economy for at least the past decade: the first concerns the relative efficacy of domestic and international explanations of policy, the second the comparative importance of the state and society. The traditional explanation of American trade strategy focuses on domestic society. The theory of international economic structures, on the other hand, is international and state-centered. Taken as a whole, however, this study suggests that these debates, though helpful in their early stages for clarifying the issues, have ultimately proved to be based on false distinctions.
The systemic theory of international economic structures developed here appears best at explaining the broad contours of national trade strategy, including the overall level of protection, changes in that level, and the degree of international activism or passivism. Conversely, a focus on domestic interest groups and political parties performs less well at this broader level. Yet domestic political pressures remain the best explanation of the pattern of protection across industries and the specific rates of duty established for each industry. The alternative strengths of domestic theories and the theory of international economic structures indicates a disjuncture between the levels of analysis. The international and domestic levels do not lie on a continuum from which alternative theories can be chosen at will to explain a single phenomenon. Rather, theories from each level explain different parts of the puzzle. Moreover, domestic and international factors may exert a synergistic effect on politics. This is seen most clearly in the Smoot-Hawley Act of 1930, when the changing constraints and opportunities of the international economic structure interacted with the existing congressional propensity for logrolling to create some of the highest duties on record. Likewise, to the extent that the framework for understanding the domestic political process set forth in Chapter 2 is helpful in explaining trade strategy, it suggests that both the state and society are important and, indeed, interactive. Rather than being starkly defined alternatives, these various approaches to understanding politics are actually complementary. The task still before us is to integrate domestic and international, statist and society-centered explanations. A first step was taken in this direction in Chapter 2, but at this stage it remains only suggestive.
Postscript: Lessons for the Present
The arguments developed in this book suggest that protection is not necessarily a sign of domestic political failure, as many economic and domestically oriented explanations imply. Both protection and free trade are legitimate and effective instruments to be used in the pursuit of national advantage. We should not allow an economic ideology, or a concern with cosmopolitical economy as Friedrich List termed it, to blind us to this historical and deeply political reality.
Nonetheless, current policy, classical international trade theory, and the theory of international economic structures all agree that universal free trade is still in the national trade interest of the United States. Drawing upon the decline of the Pax Britannica in the late nineteenth century and the interwar period, however, current variants of the theory of hegemonic stability predict that America’s declining hegemony will lead to increased economic instability, international conflict, and national protectionism. Robert Gilpin, in particular, argued in 1975 that there are three possible scenarios for the present and future international economy.
The first is that the original core [that is, the United States] somehow manages to retain or reassert its dominant position relative to the emergent cores; it continued to set the rules… . The second possibility is a shift from a hierarchically organized international economic system to one composed of relatively equal cores; the several cores together negotiate the rules governing trade, money, and investment… . Finally, the system can break down and fragment into conflicting imperial systems or regional blocs… . Although none of these possibilities is inevitable … the third is most likely.5
Two years later, Gilpin reflected on this same point: “Drawing parallels between the contemporary period and past eras is obviously a risky undertaking… . Yet, the strains and tensions of the present are there, and the experience and lessons of the past indicate cause for concern over the future of the international economic order in an era of weakened international and domestic leadership.”6 Both Stephen D. Krasner and Charles P. Kindleberger echo Gilpin’s apparent pessimism for the future of the liberal international economy constructed under the Pax Americana.7
The “1930s analogy,” however, is inaccurate. The present evolution of the international economic structure is quite different from that experienced in the period studied above. Whereas the structure of British hegemony first evolved into bilateral opportunism and then unilateral opportunism, the current direction has been toward a proliferation of opportunists.
In the mid-1960s, the United States evolved from a hegemonic leader into an opportunist (see Table 1.2 and Figure C.2). The Federal Republic of Germany was also transformed from a spoiler into an opportunist in approximately 1965. France followed West Germany’s path, evolving into an opportunist in the mid-1970s. By 1975, as a result, a clear structure of multilateral opportunism had emerged. If present trends in productivity growth continue, Japan is likely to join these nation-states within the next decade.
Consequently, the present evolutionary trend within the international economy is not toward unilateral opportunism as occurred during the decline of the Pax Britannica. Rather, the Pax Americana has evolved into multilateral opportunism and is likely to remain so into the foreseeable future. It will be quite different from its historical predecessor. If the theory developed above is correct, the international economy will remain relatively open and liberal despite the decline of American hegemony. The international economy will resemble that which existed between 1912 and 1930, but we are unlikely to see a repetition of the economic conflicts of the 1930s. Indeed, considerable potential for international economic cooperation presently exists.
Four structural threats to the liberal international economy are apparent, however. First, any evolution of the international economic structure away from bilateral or multilateral opportunism is likely to prompt preemptive protection or defection. As in the Smoot-Hawley Act of 1930, any impending transformation of the international structure reduces incentives for cooperation among opportunists and encourages protection. This is an unlikely possibility in the near term. The structure is likely to remain relatively stable at least for the foreseeable future.
Figure C.2. The international economic structure, 1950–1977Second, although a change of structure may be unlikely, changes within the structure of multilateral opportunism are already under way. The last decade has seen a leveling or equalization of productivity rates among the advanced industrialized countries.8 As the number of opportunists and near opportunists within the structure proliferates, the problem of free riding once again becomes important. Opportunists restrain protectionism in one another through the threat of retaliation. As the number of opportunists expands, the probability that any one opportunist will punish or retaliate against “cheating” at the margin declines. Each may hope that others will ignore its own violations while otherwise strictly enforcing the trade rules. Thus, rather than being a positive development, the expansion of the number of opportunists is actually a potential threat to the liberal international economy. It is not clear how many opportunists are necessary before the politics of mutual restraint breaks down. The problem is complicated by the differences in relative size between the opportunists. Even as an opportunist in the late 1970s, France was approximately half the size of the United States or the Federal Republic of Germany and could potentially free ride better than either. Cooperation and mutual restraint clearly become more difficult as the number of opportunists expands.
Third, employing a “tit-for-tat” strategy to induce international cooperation or universal free trade is not without risks. As seen in the early 1920s, actual or feared protectionism in one opportunist will stimulate similar action by others in return. Given the fragility of universal free trade under a structure of multilateral opportunism, policy makers should resist any actions which threaten or imply that they will defect from their current commitment to free trade. A tit-for-tat strategy, however, must be retaliatory to be effective. The danger here is that retaliation may be misperceived by the target as protection, and vice versa.9 Statesmen should not be reluctant to retaliate against cheating, but they must strive to maintain the distinction between retaliation and protection.
Finally, as in the 1920s, the level of international economic instability has an important effect upon the trade strategies of nation-states in a structure of bi- or multilateral opportunism. Despite the oil shocks of the 1970s, the present international economy remains relatively stable. The patterns of trade and finance have been altered, but the disruptions have generally not been as large as those that followed World War I. Indeed, the success of the advanced industrialized countries in regulating the oil shocks may demonstrate the potential of a structure of multilateral opportunism. This is a hopeful sign for the liberal international economy.
It is this level of instability, however, which policy makers can most directly affect. Countries must actively stabilize exchange rates at realistic levels. They must carefully monitor trade patterns and price levels to ensure gradual and steady evolution. A renewed emphasis on growth will also help mitigate instability. As noted in Chapters 1 and 5, instability renders cooperation more difficult just when it is most necessary. All involved should realize that restabilizing an international economy is much more difficult than safeguarding existing levels of stability. This is, indeed, the lesson of the 1920s.
1McKinley and Wilson each served two consecutive terms in office but are counted as one administration. The only president not considered in this analysis is Calvin Coolidge. No tariff bills were passed under his administration, and he did not appear to play any role in shaping the approach of Hoover, his successor. Theodore Roosevelt is included even though no tariff bills were enacted between 1901 and 1908. As argued in Chapter 4, Roosevelt played a key role both in undermining the success of reciprocity and in setting the stage for Taft and the Payne-Aldrich Act of 1909.
2See Jonathan J. Pincus, Pressure Groups and Politics in Antebellum Tariffs (New York: Columbia University Press, 1977); Bennett D. Baack and Edward John Ray, “The Political Economy of Tariff Policy: A Case Study of the United States,” Explorations in Economic History 20 (January 1983): 73–93; Robert Baldwin, The Political Economy of U.S. Import Policy (Cambridge: MIT Press, 1985); and Real P. Lavergne, The Political Economy of U.S. Tariffs (New York: Academic, 1983).
3The political implications of smallness have been discussed by Peter J. Katzenstein, Small States in World Markets (Ithaca: Cornell University Press, 1985).
4See, among others, Barrington Moore, Jr., Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of the Modem World (Boston: Beacon, 1967); Alexander Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays (Cambridge: Belknap Press of Harvard University Press, 1962), pp. 1–30; and Peter Gourevitch, Politics in Hard Times: Comparative Responses to International Economic Crises (Ithaca: Cornell University Press, 1986).
5Robert Gilpin, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (New York: Basic Books, 1975), p. 72.
6Robert Gilpin, “Economic Interdependence and National Security in Historical Perspective,” in Klaus Knorr and Frank N. Trager, eds., Economic Issues and National Security (Lawrence: Regents Press of Kansas, 1977), p. 61.
7Stephen D. Krasner, “State Power and Structure of International Trade,” World Politics 28 (April 1976): 317–47; and Charles P. Kindleberger, The World in Depression, 1929–1979 (Berkeley: University of California Press, 1973).
8Historically, labor productivity has correlated strongly across sectors within a country. Thus a country that was on average more productive than others typically dominated all manufacturing sectors. With the introduction of so-called “industrial targeting” strategies, this relationship may be breaking down. See Appendix.
9Even low levels of misperception can undermine the utility of tit-for-tat as a cooperation-inducing strategy. See George W. Downs, David M. Rocke, and Randolph M. Siver-son, “Arms Races and Cooperation,” in Kenneth A. Oye, ed., Cooperation under Anarchy (Princeton: Princeton University Press, 1986), pp. 118–46. The tariffs on Japanese products imposed by the Reagan administration in April 1987, in retaliation for Japanese violations of an earlier agreement on semiconductor chip pricing, are an excellent example of the type of retaliation proposed here. The tariffs are contingent on specific Japanese behavior and imposed upon products in which there is substantial foreign competition, thereby reducing the protection that would otherwise be provided to American industry.