Reciprocal Trade Agreements Act

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The Reciprocal Trade Agreements Act, otherwise known as the RTAA, was a US bill of legislation enacted by Congress on June 12th, 1934 as part of an effort to reconstruct the global trade regime at a time when international economic integration had reached a nadir. It was the first step by the world's emerging hegemon aimed at overturning the world's high tariff walls erected after WW1. Essentially it transferred the power of setting tariffs from Congress to the President. Franklin Delano Roosevelt was then able to initiate bilateral negotiations for reciprocal reductions, meaning he was able to lower American tariffs on trade from another country so long as that country acted in kind. Tariff reductions could be as large as 50%. The Act also continued the practice of Most-Favored Nation (MFN) which greatly increased and encouraged multilateral trade. Whenever two countries negotiate new trading privileges, they would automatically have to bestow those same privileges on their MFN's. The Act was passed by a democratic majority who were looking to counteract the disastrous effects of the Smoot-Hawley Tariff passed by the Republicans in 1930 that had only encouraged American trade partners to retaliate and raise tariffs of their own. International Trade and American exports declined and the depression deepened. The act was crafted by Cordell Hull in an attempt to bring about institutional change and resurrect the export industry and, in a theoretical sense, expedite third party enforcement of transactions costs. This institutional change was a reconfiguration of power in the organs of the US government that initiated a badly-needed shift in American Foreign Policy away from protectionism and management toward free trade and liberalization.

Theories of International Trade in Relation to the Reciprocal Trade Agreements Act (RTAA)

As stated above the RTAA was an influential piece of legislation that transformed the direction of US trade policy away from protectionism and towards free trade.  As a result of this dramatic shift and because the free trade ideals of the policy continue to hold today, several theorists have attempted to explain the reason for the passing and subsequent success of the policy.  These trade theorists are split into two camps: those that believe institutions explain its success (i.e. Michael Bailey, Judith Goldstein, and Barry Weingast) and those that believe a change in interests is most important in explaining its staying power (i.e. Michael Hiscox).  As stated above, the timing of this transformation is somewhat unique given the tumultuous times surrounding WW1, the interwar period, and the disastrous effects of WW2.

Bailey, Goldstein, and Weingast emphasize the importance of the work of Cordell Hull in transforming the institutional structure to give power of setting tariffs towards the President and away from Congress.  They also say that the design of the bill and the structure it gave to the institutions helped explain its success. Within the institutional perspective, it helpful to examine if there were any changes in policy opinions of politicians between the passage of the Smoot-Hawley Act in 1930 and a complete 180 turn in policy with the passage of the RTAA in 1934.  Empirical analysis shows that very few politicians changed their opinions in the four years between the two acts, but the important difference is the control of Congress passing from the Republicans to the Democrats.

Michale Hiscox argues that the staying power of the RTAA can be explained by the transformation of domestic interests. Global interests changed dramatically as a result of the destruction to industry in the WW2 which was the first war to blur the line between civilian and soldier, specifically attacking industry in Europe and Japan.  This means that the US was one of the few industrialized nations to maintain a functioning industrial sector through the war.  Throughout the war and after, European demand for American goods drove export industries throughout the US and meant that these industries came together to strengthen the RTAA and ensure that its benefits could be seen by all.