CONTROL MATERIAL DE LA ACUSACIÓN

The First World War (WW1) which broke out in 1914 marked another sharp break in the history of commercial policies of many countries. The exigencies of the War not only strengthened the protectionist trade policy inherited from the previous period (the 1870s-1910s), but they also exacerbated problems associated with the conduct of international trade. In almost every country, new barriers to trade were erected in response to changes in economic and political conditions brought about by WW1.

Britain, the most significant country which had clung to free trade since 1846, signalled a departure from the past with the imposition of 33.3 percent import duty on a few luxury items such as motor cars and parts, musical instruments, clocks, watches and cinematographic films through

the enactment of McKenna legislation in 1915. The protective flavour of this new import duty was apparent, because unlike the previous luxury duties, it was not matched by domestic taxes to eliminate the protective effects (Kindleberger 1989, 161-196). In addition, the new law allowed Britain to give preferential treatments to countries in the British Empire, which was not possible under the free trade regime previously.

During the WW1, Britain’s trade policy was primarily characterised by efforts to strengthen trade cooperation with other countries within the British Empire. In 1919 two legislations were enacted with provisions favouring trade within the Empire. First, the Finance Act, which extended provisions favouring Empire’s trade, originally introduced under McKenna legislation. This new law reduced import duties on tea, cocoa, coffee, chicory, currents, and certain dried fruits by one-sixth, and on wine by one-third if they came from the Empire. The other legislation, Key Industries Act, designed primarily to strengthen defence industries, equally contained preferences for products within the Empire. Protection was further strengthened in 1921 when the Safeguarding Industries Act was passed, imposing 33.3 percent duty on goods of “strategic importance” to Britain such as scientific instruments, glassware, wireless valves, ignition magnetos and hosiery latch needles. This Act was originally intended to give temporary protection to British industries of only five years, but when the five-years period ended in 1926 the Act was not only extended (for another five years), it also enlarged items liable for duties (Capie 1983, 41).

In the few years after the end of WW1, political ideology played an important role in determining trade policy in Britain. For example, a liberal trade ideology subscribed to by the Labour Government during a brief period between 1924 and 1925 resulted in the repeal of the McKenna legislation and allowed some safeguarding duties to lapse. However, the administration under a protectionist-inclined Conservative Government from 1925-1928 introduced protective

duties on wrapping paper, pottery, button and enamel hollow-ware. Similarly, when Labour Party came back into power in 1929 some safeguarding duties were not renewed and anti-dumping provisions under the Safeguarding Act were repealed. Protectionism strengthened once again during the Coalition Government which came into power in 1931.

Although by the beginning of the 1930s Britain’s moved towards protectionism could be considered complete, yet the elements of protection continued to strengthen (Capie 1983, 63). In 1931 the Abnormal Importation Act was enacted, allowing for the imposition of import duties of up to 100 percent on certain goods, although in practice the highest applied rate was about 50 percent. The list of items subject to duties, however, was not very long covering mainly pottery, sanitary ware, tiles, metal furniture, textiles, camera and electric lamps. A marked increase in protection occurred in February 1932 when the Import Duties Act was introduced imposing 10 percent duty on all other goods not yet attracting any duties. Exceptions were only given to a handful of items, primarily food products and raw material originating from Empire countries. The speed of tariff increases was tremendously fast; in April 1932 the rate was revised upwards, doubling the nominal rate to 20 percent. And by the end of that year iron and steel products including pig iron, girders and sheet were imposed with 33.3 percent duty. Again in 1935, the duty on iron and steel was raised to 50 percent in an effort to ward off competition from other European steel producers. In short, the extent of protection in Britain increased sharply at the beginning of the 1930s. Prior to this, almost 85 percent of British imports were free of duty, but the number was reduced to only 30 percent at the end of 1932.

As if the use of import tariffs was not adequate to provide protection to domestic producers, Britain then started to resort to import quota, fundamentally in the middle of 1930s. The first quota system was introduced for the importation of iron and steel from other European

countries in 1935 as British steel companies found it difficult to compete against cartels of iron and steel from continental Europe. The import quota system was then extended to imports of agriculture products, notably meat, from all countries including those from the British Empire.

A number of forces were at work which forced Britain to make a turn-around to protectionism in the early 1930s after it had clung to free trade for almost a century. A prolonged business cycle downturn and bad economic condition contributed greatly to Britain’s departure from a free trade policy. Initial stress due to bad economic condition was evident during the WW1 (1914-1918). Majority of the people faced difficulties in carrying out their normal lives because many aspects of economic policy setting were geared towards the War. Trade flows and economic activities suffered quickly and severely during the War – consumer goods production was replaced by military production, shipping was requisitioned for the war, and transporting goods around the world encountered enormous hazards (Capie 1983, 69). Economic conditions improved slightly in the early years following the end of WW1, especially in terms of the growth of Gross Domestic Product (GDP), although unemployment and the loss of potential outputs were still high. Throughout the 1920s the general public in Britain experienced enormous distress as the economy fell into a long period of stagnation; a period of very low growth, due to lack of demand, both internal and external for British products, thus the economy was unable to elevate national output to a satisfactory level.19 Consequently, the depression pushed up unemployment to reach one million people or 7 percent in the middle of 1920s, and continued to soar to the peak of three million in 1931 (Gomes 2003, 277).

19 _{For the twelve years period from 1913-1925, the annual income growth of Britain was at 0.2 percent. This indicated}

a very low growth since it recorded the growth of annual income of 1.7 percent for the previous 14-years period from 1890-1913 (Kenwood and Lougheed 1999, 177).

At the end of 1920s Britain’s economic malaise became chronic problems. Internally, rigidities in wage and cost structures did not allow the costs of labour, thus final products to fall despite the existence of huge supply of labours in the country. Externally, Britain incurred huge trade deficits, recorded with almost all other countries.20 In addition to the rigidity of the cost structure, British currency was overvalue due primarily to the fact that the sterling was peg to the gold standard; therefore, it was impossible for a natural adjustment in the balance of payment account occur.

Because of these chronic economic problems, it was widely acknowledged that John Maynard Keynes decided in 1930 to break away from free trade ideology that he had subscribed for a long time.21 This happened after a series of conventional remedies and initiatives to increase domestic demand were found to be of “not responding, impractical and inexpedient” due to constraints under which the British economy operated (Gomes 2003, 279). Keynes then contended that imposing import tariffs to generate revenue would be a pragmatic remedy to address the unemployment problem; although he stressed that this measure should only be temporary. Keynes also argued that the economics of free trade would not work under the situation of large scale unemployment. Furthermore, chronic weaknesses in the balance of trade were made worse by the slump in world demand. This condition warranted the imposition of tariffs to switch demand from foreign to home goods, thus resulting in increased employment in domestic industries.

20 _{In fact Britain experienced trade deficits for most of the years starting from the middle of nineteenth century. In}

1870 the trade deficit was in the amount 58.7 million pound, recorded after goods imported were valued at 302. 8 million against the export value of 244.1 million. In 1914 its trade deficit increased to 170.4 million pound, with total import and export stood at 696.6 and 526.2 million respectively (Capie 1983, 13).

21 _{Keynes previous record as a free trader was unquestionable. In 1923 he wrote that: “We must hold to Free Trade, in}

its widest interpretation, as inflexible dogma, to which no exception is admitted, wherever the decision wrest with us … we should hold to Free Trade as a principle of international morals, and not merely as a doctrine of economic advantage”(Keynes CW 1977).

Concerns over “unfair trade practices” allegedly pursued by a number of countries, in particular Germany and the US, and the worry over the influx of foreign goods at the expense of domestic industries contributed to the British switch to protectionism. Since the early 1920s there were growing resentments among producers as well as policy makers over the practice of dumping, accused of being done by foreign companies especially of iron and steel, tyres, and glass bottles aimed at penetrating British market. Consequently at the end of 1920s, allegations of dumping became common.22 The National Federation of Iron and Steel Manufacturers, for example, claimed that it was impossible for British steel companies to compete against companies from continental Europe. This federation accused German steel companies of being involved in dumping their products by selling them in Britain at prices below of those sold in Germany, so the federation pressed for appropriate actions to be taken, especially through the introduction of anti- dumping law. Besides the pressure for protection to protect industries from dumping, there were increasing sentiments particularly by those influenced by mercantilist arguments to protect domestic industries against the flood of foreign imports. They were primarily worried over the continued increase of imports and the prolong Britain trade deficits experienced for over a decade.

The continuing existence of pressure groups, existed in different forms at different times, lobbying for protection was another significant force in influencing British trade policy. In fact strong lobbying groups demanded for protection emerged soon after the Britain’s adoption of a free trade policy. The Fiscal Reform League founded in 1870 was the earliest, before the formation of a more famous lobbying group, the National Fair Trade League in 1881. However, these groups were unsuccessful in their demand for protection due to various societal factors existed at that

22 _{At this time, although the allegations of dumping were common, but the evidence of dumping was scanty; only nine}

applications for the imposition of anti-dumping duty were received by the Board of Trade, and only two were granted, duties on glass bottles and vulcanised tyres (Capie 1983, 49).

time. Britain witnessed a growing number of pressure groups starting from the early twentieth century when domestic economic conditions deteriorated.

In 1903, the Tariff Reform League was formed with two main objectives and immediately became a formidable pressure group under the leadership of Joseph Chamberlain, a former Colonial Secretary. The first objective of the group was to protect the existence of British industries from the onslaught of foreign competitors. This group argued that the conduct of international trade was unfair to British producers because, while goods from foreign countries could enter British market duty free, goods from Britain were imposed with import duties when entering their markets. The other objective of the group was to forge closer economic relations among countries within the British Empire through reciprocal provisions of preferential tariffs. By the 1920s, the Tariff Reform League gained momentum and attracted wide support from various quarters of societies including politicians and businessmen with special interests. At the same time numerous trade and industry associations were complaining with increasing voice about difficulties faced by their members to compete with foreign competitors. Prominent among these associations were National Federation of Iron and Steel (NFIS), Federation of British Manufacturers (FBM) and National Union of Manufactures (NUM).

The Netherlands, another significant country which had managed to maintain liberal trade policy since the sixteenth century turned to protectionism in the early 1930s. Kindleberger (1989, 178) noted that because of increasing domestic resentments over declining wheat prices, the Netherlands decided to regulate farm prices in 1931. This was done with the introduction of the Wheat Act in 1931, setting the domestic price of wheat at 12 florins per kilogram. In 1932, as a response to the depreciation of pound sterling, the country declared fiscal emergency by imposing a general duty of 25 percent on agriculture products under the Dairy Crisis Act and the Hog Crisis

Act. These two acts were then combined into the Agricultural Crisis Act in 1933 with a broadening coverage (Gordon 1941, 307). In addition, the Netherlands also imposed licensing requirements not only on imports, but also in some cases on exports. In 1931 an export quota was established for cases where foreign countries imposed import quotas for its products. The quotas were distributed among exporters based on their historical record of exports. An export licence attracted some fees, in the amount of 70-100 percent of the difference between world price and the market price in the importing country, with the proceeds then distributed back to Dutch producers of particular goods (Gordon 1941, 356).

Major continental European countries such as Germany and France witnessed the strengthening of protectionist elements in trade policy during the inter Wars period. Germany, already protectionist in outlook at the eve of the WW1, underwent a minor change in trade policy during the WW1. After the outbreak of the War, Germany trade policy was geared towards the fight against the blockade imposed by its enemies in an effort to secure its military and essential supplies. During this time it was not only that Germany did not collect any duties for the importation of agriculture and raw materials, but it also imposed a ban on the export of these items. Immediately after WW1 ended, in which Germany was the losing side, its trade policy was devised at the behest of the victorious powers; the countries in the Allied Forces. More specifically, Germany was required by the Treaty of Versailles signed in 1920 to grant the Allied countries unilateral and unconditional most-favoured-nation treatments for five years. When the five years period ended in 1925, especially after the problem of heavy fluctuations in its currency stabilised, Germany decided to return to pre-war protectionist policy with the enactment of “little customs duty law” (Hentschel 1989, 792). Under this law, duties on iron and steel and agriculture were reintroduced, although not to the level requested by the agrarian pressure group east of Elbe (Junkers).

Beginning in the 1930s Germany overall economic policy was devised to deepen industrialization, therefore, its trade policy was used as a supplement to ensure a continuous access to the import of foods and raw materials (Kindleberger 1989, 181). The new economic plan, especially the Four Year Plan devised in 1936, aimed at producing synthetic materials and gasoline from coal, because these items were argued to be important especially during wartime. Up to this time, the sentiment of German general public was primarily of unhappiness over the loss of its African colonies in the Versailles Treaty, particularly Cameroon, since it was an important source of raw materials for energy generation. The strategy of securing foods and raw materials supply was, however, changed towards the end of 1930s, when Adolf Hitler, then the Chancellor, focussed its attention at securing them from countries adjoining Germany. At one meeting held in May 1939, he explained the need for enhancing relations with countries in the east of Germany in order to guarantee an uninterrupted supply of food. He argued that colonial territories would not solve the scarcity of food, which Germany had experienced during WW1, because other countries could block the supply. Also, his directive to the Economic Staff Group in May 1941, just before the attack on the Soviet Union, specifically asserted that this new strategy was designed to secure continuous food supplies from neighbouring countries east of Germany.

The WW1 strengthened protectionist agitation in France. By 1918 the minimum tariff rate was raised from 5 to 20 percent, while maximum rate was also increased from 10 to 40 percent. France was argued to be the first country to introduce import quota to provide additional protection to domestic producers of both agriculture and industries (Kindleberger 1989, 162). Protectionism enhanced further between 1919 and 1931 when laws were enacted to extend the list of agriculture products, of which the French government could change the rate of import duty during emergencies. Originally this provision was provided by an old law of 1897, the so-called loide

The WW1 caused a fresh request for higher duties in the US; this time it came from a new group of “infant industries”, which had started to produce certain products, such as chemicals and dyes, originally pioneered by industrialists in Germany (Robertson 1973, 663). The US authority responded to this request with the passing of the Emergency Tariff Act of 1921, and in 1922 a permanent legislation, the Fordney-Mc Cumber tariff, was enacted allowing for the increase of average duty to about 33 percent. Throughout the 1920s, people aligned to the Republican argued that high tariffs contributed significantly to the attainment of prosperity in the US, especially since the country recorded high trade surpluses with other countries, forgetting that the high level of exports was only a result of the readiness of Americans to lend abroad in quest for higher rate of returns for their investments. When the country started to experience economic downturn in 1929, these people thought that serious depression could be avoided by again increasing the level of tariffs. In 1930, after a year of debate, the Congress passed the Hawley-Smoot tariff, which raised average duty to over 60 percent and imposed tariffs on more than 12,000 items (Husted and Melvin 1995, 166). Although 34 foreign countries collectively lodged a protest note over the bill and a huge number of American leading economists urged President Herbert Hoover to veto the bill, the President was unremoved and signed the bill into a law.23

Many competent observers argued that the Hawley-Smoot tariff was the main cause for the deepening of the 1930s Depression. The passing of this legislation resulted in massive retaliations by other countries; some immediately increased their tariffs while others responded with the