Foreign Trade

Countries trade with one another to obtain goods and services that are of better quality than, less expensive than, or simply different from, those produced at home. Since independence, Latin American foreign trade conditions have been characterized first by free trade and unprecedented prosperity (1820–1930), then by protectionism (1930–1973), and increasingly since 1973 by trade liberalization. For many observers, foreign trade and external factors have played a central role in shaping the region's development. For others, these factors have played, at best, a supplementary, secondary role to dominant internal forces.

THE YEARS OF PROSPERITY (1820–1930)

The foreign trade of most Latin American countries increased gradually between 1820 and 1860 as colonial restrictions were abolished and political stability in the region increased. As the vital collective need for freedom of international exchange, global movement and flow of commodities, people and capital increasingly is both recognized and satisfied, Latin America becomes an integral, vibrant segment of the global production system. Exports and imports rose sharply during the so-called golden age from 1860 to 1910. The speed of trade expansion slowed down, however, between 1910 and 1930, as rich mineral deposits were exhausted and the best lands had been incorporated into agriculture. The period from 1820 to 1930, which is often described as one of free trade, laissez faire, or "outward orientation," also included instances of protectionism associated with import duties imposed because of low administrative collection costs. These occurred because the cost of collecting import duties/taxes is often low (less than 5%) in comparison to other taxes such as those on income (often as high as 30%) or on sales (ranging from 10% to 50%).

Most of the products exported from Latin America between 1820 and 1930 have been described as "primary," that is, originating in agriculture or mining. All were "composite" in that they embodied not only value from agriculture and mining but also value added by manufacturing and services, such as trade, transportation, finance, and insurance.

Latin American foreign trade expanded explosively after 1860 owing to a convergence of favorable supply-and-demand factors. As the industrial revolution transformed Britain, Germany, France, and the United States, there emerged a strong demand for raw materials. Furthermore, Britain abolished tariffs protecting its domestic agriculture. A simultaneous technological revolution, which brought the invention of the steam engine, propeller, and metal hull, precipitated an unprecedented reduction in maritime transportation costs. Consequently, agricultural or mineral products from distant Latin America could now compete with those from the Caribbean and the more industrialized countries. Furthermore, rapidly rising incomes pushed up the demand for food, other consumer products, and raw materials. Unable to meet rapidly rising demand internally, Europe and North America increasingly turned to Latin America for supplies of more, better, and less expensive agricultural products and raw materials.

As a consequence, by the middle of the nineteenth century Argentina had become a major exporter of meat and hides, Cuba of sugar, Brazil of coffee, Venezuela of cacao, Peru of guano, and Chile of copper and wheat, which went to California during the gold rush years. Supplies of agriculture- and mining-based exports increased as new land was incorporated into production in Argentina, Uruguay, Brazil, and Chile. Export growth was facilitated by successive waves of immigrants, especially from southern Europe, into these regions. In addition, recurrent export bonanzas attracted large investments, first by the British and subsequently by the Americans, in agriculture, mining, railroads, public utilities, and industry. They also made it easier for Latin American governments to borrow in the capital markets of Europe and the United States.

The impact of free and rapidly growing, foreign trade on Latin American incomes was considerable but uneven. According to estimates by Angus Maddison, by 1929 real per capita gross domestic product (GDP) in U.S. dollars at 1965 factor cost (that is, calculated at the value of the dollar in 1965) had reached $908 in Argentina. This was almost double the income level of Japan ($485), about half that of the United States ($1,767), and more than 80 percent of the income in the United Kingdom ($1,105). Per capita incomes were, however, lower in other countries: In Brazil it was $175, in Chile $580, in Colombia $236, in Mexico $252, and in Peru $177.

By 1913, according to Maddison, exports of Latin American countries had reached levels close to or even higher than those in the rest of the world. Average Latin American per capita exports, expressed in U.S. dollars at then-current prices and exchange rates, were $31.90 (in Argentina it was $66.70; Brazil, $13.30; Chile, $41.20; Colombia, $6.80; Cuba, $66.70; Mexico, $9.90; Peru, $9.70; Uruguay, $61.60; and Venezuela, $10.90) as compared to an average for developed countries of $37.30 (France, $33.40; Germany, $35.90; Japan, $6.90; Netherlands, $67.00; United Kingdom, $56.00; and the United States, $24.50), $0.70 for China, and $2.60 for India. For Latin America, agriculture- and mining-based exports provided both an engine and a facilitator. The outflow of exports raised welfare by bringing a corresponding inflow of imports, immigrants, capital, institutions (e.g., broad-based educational), government (decentralization), finance (improved capital markets), transportation (railroads), and ideas. Latin America, Europe, and North America achieved an unprecedented degree of economic interdependence. Latin America supplied the agricultural and mineral primary commodities; Europe and the United States the industrial ones.

Latin American economies remained, however, highly dependent on one, or a few, export products. The following figures show the percentage of each country's total exports represented by individual products in 1929: Argentina (wheat, 29.2; maize, 17.6; frozen, chilled, and tinned meat, 12.8; linseed oil, 12.6), Brazil (coffee, 71.0), Chile (nitrates, 42.1; copper, 40.4), Colombia (coffee, 60.6; petroleum, 21.3), Cuba (sugar, 79.5), Mexico (silver, 20.6; other minerals, 47.0), Peru (petroleum, 29.7; copper, 22.4; wool, 21.0; sugar, 11.5; lead, 5.1), Uruguay (wool, 30.7; frozen, chilled, and tinned meat, 30.2; hides and skins, 12.7), and Venezuela (petroleum, 74.2; coffee, 17.2).

Between 1900 and 1930 agriculture-based products dominated exports from Colombia (coffee), Paraguay (quebracho, other timber), El Salvador (coffee), Brazil (coffee), Argentina (wheat, maize), Guatemala (coffee, bananas), Costa Rica (coffee, bananas), Cuba (sugar), Nicaragua (coffee, bananas), Uruguay (meat, wool), Ecuador (cacao), and Panama (bananas). Mining-based products dominated exports from Venezuela (copper, petroleum), Mexico (petroleum, silver), Chile (nitrates, copper), and Bolivia (tin). Peru exported both mineral (petroleum) and agricultural (cotton) products.

In the eyes of many, however, foreign trade was by no means an unmitigated blessing for the region before 1930. Demand and prices for primary exports fluctuated wildly, unleashing large shocks that Latin America could not always master. Because cyclical booms were followed regularly by precipitous declines, export revenues, exchange rates, capital inflows, trade-based tax revenues, and domestic income experienced unprecedented instability. Exhaustion of rich mineral deposits and fertile agricultural lands exposed the region's excessive dependence on primary commodities and its uncertain growth potential. Finally, some perceived that the benefits from trade accrued primarily to the workers and (foreign) capitalists of isolated production areas, without a lasting and positive impact on the majority of the population. Not even the worst prognosis, however, anticipated the calamitous collapse of foreign trade between 1929 and 1932 (see Table 1).

THE YEARS OF PROTECTIONISM (1930–1973)

The degree of recognition and satisfaction of the collective need for freedom of trade and movement of people and capital experiences a precipitous decline after 1930. The Great Depression of the 1930s reduced the demand for primary export products, caused a decline in the relative prices of primary exports with respect to industrial imports, and suddenly stopped capital flows from Europe and the United States to Latin America. According to figures compiled by Angus Maddison, between 1929 and 1932 the average export volume for Argentina, Brazil, Chile, Colombia, Cuba, Mexico, Peru, and Venezuela fell by 35.8 percent, the average purchasing power of exports by 55.1 percent, the average import volume by 65.9 percent, and GDP by 18.5 percent. Chile suffered the most, with export volume declining by 71.2 percent, purchasing power of exports by 84.5 percent, import volume by 83.0 percent, and GDP by 26.5 percent. After initial adherence to old policy weapons and gold-standard rules, Latin America responded to the collapse of foreign trade with new approaches such as exchange controls, quantitative and bilateral trade restrictions, debt delinquency, and debt renegotiation with much larger write-offs than in the past.

The role of foreign trade was further reduced as a consequence of the protectionist, inward-oriented policies advocated after 1950 by Raúl Prebisch, the United Nations Economic Commission for Latin America, and their structuralist theory of development. Import-substitution policies, which promoted domestic production of previously imported industrial commodities, frequently resulted in the neglect of exports. This exacerbated the isolation of Latin America from the rest of the world. According to Maddison, the average ratio of merchandise exports to GDP at current prices for Argentina, Brazil, Chile, Colombia, Mexico, and Peru declined from 22.1 percent in 1929 to 9.l percent in 1973. In contrast, the average ratio of merchandise exports to GDP for France, Germany, the Netherlands, the United Kingdom, and the United States increased from 15.8 percent to 19.2 percent during the same period.

Latin America's share of the value of world exports experienced a sharp decline, from 10.9 percent in 1950 to a meager 3.9 percent in 1992. Between 1950 and 1990, Argentina's share declined from 1.92 to 0.37 percent, Brazil's from 2.22 to 0.95 percent, Cuba's from 1.10 to 0.20 percent (in 1980), and Venezuela's from 1.91 to 0.53 percent. The decline in the relative importance of Latin America in world exports coincided with the widespread implementation of protectionist policies of import substitution. In contrast, between 1950 and 1990 the share of West Germany in the value of world exports increased from 3.29 to 12.39 percent and that of Japan from 1.37 to 8.69 percent. Similarly, Latin American imports as a percentage of world imports declined from 8.10 in 1950 to 2.82 in 1990. The introduction of neoliberal policies of trade liberalization, privatization, and stabilization, beginning with Chile in 1973, has contributed to a slight increase in the relative importance of Latin America in world imports and exports since 1989.

At least in part, the post-1930 decline in the relative importance of Latin America in world trade can be explained by its continued dependence on primary exports and the decline in their prices relative to industrial imports. As the figures presented in Table 2 reveal, the principal export commodities of most Latin American countries in 1985 were of agricultural and mineral origin. According to Richard Lynn Ground, Latin America's merchandise, or net barter, terms of trade fell from 100.0 in 1928 to 51.8 in 1933, reaching a level of 63.6 percent in 1987. (The merchandise, or net barter, terms of trade measure the relative movement of export prices against that of import prices. The merchandise terms of trade index is calculated as the ratio of a country's index of average export prices to its average import price index. Numbers above 100.0 are favorable, and those below 100.0 are unfavorable, relative to the base year.) After a sharp deterioration during the Great Depression, the merchandise terms of trade of Latin America recovered by 1950 (93.6 percent), declined in the 1960s (49.2 percent in 1965), rose again in the 1970s (76.7 percent in 1980), only to retreat in the 1980s (62.1 percent in 1986).

As a consequence of the Great Depression and the popularity of protectionist ideologies, most Latin American countries increased nominal tariffs after 1930. By the 1960-to-1965 period, average nominal tariffs had risen to 148.8 percent in Argentina, 85.0 percent in Brazil, 89.0 percent in Chile, and 139.0 percent (1972–1977) in Uruguay. Nominal tariffs on consumer goods were even higher, reaching 235.0 percent in Argentina (1960–1965) and 204.0 percent in Chile (1960–1965). The 1930-to-1973 period of protectionism and import-substitution industrialization has been gradually replaced by a new era of neoliberal trade liberalization.

Even though the 1930-to-1973 period is generally described as the age of import-substitution industrialization and inward-oriented, protectionist development, it also contained the seeds of trade liberalization efforts. Initially, such efforts were largely cornerstones of the region's integration schemes aimed at promoting import substitution by enlarging the size of the market. The Latin American Free Trade Association (LAFTA), which was launched in 1961, brought together Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, and Uruguay, which were joined later by Bolivia and Venezuela. In 1980 LAFTA was transformed into the Latin American Integration Association (LAIA), as a result of the Treaty of Montevideo. Sub regional groupings gave rise to the Central American Common Market (CACM) in 1960, the Andean Pact (ANCOM) in 1969, and the Caribbean Community and Common Market (CARICOM) in 1973. For the most part, these schemes lacked a clear commitment to free trade and made little progress.

THE YEARS OF LIBERALIZATION (1973–)

Beginning with Chile in 1973, the degree of recognition and satisfaction of the collective need for freedom of trade and movement of resources, which had collapsed following the Great Depression of the 1930s, increases to historically unprecedented levels in many countries of Latin America. As part of their far-reaching liberalization policies in this period, Argentina, Bolivia, Brazil, Guatemala, Jamaica, Mexico, Nicaragua, Paraguay, Peru, and Uruguay have reduced tariffs, simplified tariff structures, and dismantled nontariff measures. Import licenses, quantitative restrictions, import prohibitions, discretionary licensing, additional taxes, and surcharges have been abolished or significantly reduced in Argentina, Bolivia, Brazil, Chile (where quantitative restrictions were prohibited by law), Colombia, Costa Rica, Jamaica, and Peru. Substantial reductions in tariffs and simplification of the tariff structure have been introduced in Argentina, Bolivia, Brazil, Chile, Costa Rica, Honduras, Jamaica, Mexico, Nicaragua, Peru, and Venezuela. By the years 1978 to 1981, average nominal tariffs had been reduced to 34.4 percent in Argentina, 10.0 percent in Chile, 28.0 percent in Colombia, 16.8 percent in Costa Rica, and 11.5 percent in Mexico.

TRADE AGREEMENTS

Latin America has participated in such multilateral trade agreements as the General Agreement on Tariffs and Trade (GATT), which was created by the Bretton Woods Conference after World War II to reduce barriers to international trade, and the World Trade Organization (WTO), which replaced GATT after its 1986–1994 Uruguay Round. Cuba and Venezuela have criticized the decision-making process of the WTO as being dominated by a few developed nations at the detriment of developing nations. Many complaints have been raised in the GATT and the WTO about unfair protectionist and environmental practices. Trade integration begun in the 1960s, and has accelerated since the first Summit of the Americas Conference in December 1994.

As mentioned previously, a regional trade integration association, the Asociacion Latinoamericana de Integracion, ALADI (Latin American Integration Association, LAIA), was created in 1980 with Argentina, Bolivia, Brazil, Cuba, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela as members. Its central objective was the advancement of regional economic and social development through the establishment of a common market.

In addition to the multilateral and regional trade agreements, four major custom unions were created. The first customs union trade bloc, called the Andean Pact until 1996, was founded in 1969 by Bolivia, Chile, Colombia, Ecuador, and Peru with the signing of the Cartagena Agreement. In 1996 it was renamed the Andean Community of Nations (Co-munidad Andina de Naciones, CAN). Venezuela joined in 1973 and announced its potential withdrawal in 1996.

The second Southern Common Market, Mercosur or Mercosul (Mercado Comun del Sur) customs union movement originated in July 1990, when Argentina and Brazil agreed to the elimination of tariff barriers between them by December 1994. This agreement, which was extended to Paraguay and Uruguay on March 26, 1991, called for free intra-Cone movement of products by December 1995. The collapse of the Argentine economy in 2001 and continued internal conflicts between Argentina and Uruguay, Brazil and Argentina, Paraguay and Brazil, and so forth, have slowed economic integration.

On December 13, 1960, in a conference in Managua, Guatemala, El Salvador, Honduras, and Nicaragua established the Central American Common Market (CACM). Costa Rica joined the CACM in 1963. A phenomenal increase in trade between member nations had materialized by 1970. The organization was, however, paralyzed after the 1969 Football War between Honduras and El Salvador, which led to the latter's effective withdrawal, and by the political and social unrest in Central America in the 1970s and 1980s. A significant revival of the organization occurred in the 1990s. The fourth customs union/common market trade agreement is that of the Caribbean Community (CARICOM) which was established in 1973 with Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-Nevis-Anguilla, St. Lucia, St. Vincent, and the Grenadines, Trinidad, and Tobago as members.

Among the free trade agreements, the most prominent is the North American Free Trade Agreement (NAFTA), which came into effect in January 1994, with Canada, Mexico, and the United States as members. Intra-NAFTA trade increased significantly as the majority of tariffs were eliminated upon the signing of the treaty and other tariffs were gradually phased out over a fifteen-year period. However, the per capita income gap between Mexico and the United States/Canada was not reduced, i.e., there was no economic convergence, and Mexican poverty rates were not substantially reduced. Furthermore, on January 1, 1995, Colombia, Mexico, and Venezuela established the G3 Free Trade Agreement. A planned withdrawal from this agreement was announced by Venezuelan President Hugo Chavez in May 2006. In addition, the Dominican Republic-Central America Free Trade Agreement (called DR-CAFTA) between the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic has been ratified by all member nations except Costa Rica, which will hold a referendum on it. An ongoing proposal for a Free Trade Area of the Americas (FTAA), which is opposed by Cuba, Venezuela, Bolivia, Ecuador, and Nicaragua, was discussed on November 16, 2003, by representatives of thirty-four nations at a meeting in Mexico. A large number of bilateral free trade agreements have been signed in recent years by Mexico (16), Costa Rica (9), Chile (at least 15), Bolivia, Colombia, Dominican Republic, El Salvador, Honduras, Nicaragua, Panama, Peru, Uruguay, Dominican Republic, Guatemala, Venezuela and so forth. A union of South American and/or Central American nations is always contemplated. The widespread adoption of neoliberal philosophies of trade liberalization, privatization, and stabilization since 1973 has strengthened efforts to form or revive sub-regional trade blocks.

The value of Latin American exports reached $123 billion in 1990. The share of nonfuel primary composite commodities (food, live animals, beverages, tobacco, crude materials, and vegetable oils) in total exports had declined from 65.8 percent in 1970 to 41.2 percent in 1990. The growth of merchandise trade during the period 1970 to 1992 is presented in Table 3.

Exports of manufactures in 1990 were $40.6 billion, or 32.9 percent of total exports, up from 10.9 percent in 1970. Exports of machinery and transportation equipment, which were dominated by internal combustion piston engines and passenger motor vehicles, equaled $13.9 billion, or 11.2 percent of total exports, up from 2.3 percent in 1970. These originated mainly in Brazil and Mexico. Exports of basic manufactures were $14.6 billion, or 11.8 percent of total exports, up from 4.4 percent in 1970. The principal exports of basic manufactures consisted of iron and steel, which originated mainly in Brazil, Mexico, and Argentina. Other important exports were leather from Argentina, Uruguay, and Brazil; textile yarn from Brazil, Mexico, Peru, and Argentina; nonmetallic mineral manufactures from Brazil, Mexico, and Colombia; and paper and paperboard from Brazil, Chile, and Mexico. In 1990 exports of chemicals, principally from Brazil, Mexico, and Argentina, reached $7.0 billion, or 5.7 percent of total exports, up from 2.7 percent in 1970. Brazil and Mexico were the major exporters of plastics.

Brazil accounted for 90 percent of all Latin American exports of footwear in 1990. Brazil and Colombia accounted for more than 60 percent of the region's exports of textile clothing, although Argentina, Barbados, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Panama, Paraguay, Peru, and Uruguay also produced large volumes.

Brazil, Mexico, and Argentina accounted for more than 80 percent of the region's foreign exchange earnings from manufactured exports. Other countries have achieved in recent years a significant growth of their manufactured exports. Chemical elements and compounds have been exported from Trinidad and Tobago; plastics from Colombia, Uruguay, and Venezuela; other types of chemicals from Chile, Peru, Trinidad and Tobago, and Uruguay; clothing and textile yarn from Peru; plumbing, heating, and lighting equipment from Chile and Venezuela; and iron and steel from Colombia, Trinidad and Tobago, and Venezuela.

High-technology products (i.e., products having high research-and-development costs relative to total production costs) have grown at the impressive long-term annual rate of 20 percent. By 1989, Latin America's exports of high-technology products (chemicals and pharmaceuticals; plastic materials; nonelectrical and electrical machinery; transport equipment; and professional, scientific, and controlling instruments) reached $17.6 billion, with Brazil and Mexico accounting for 90 percent of the total. By the late 1980s high-technology export products represented 50 percent of Latin America's manufacturing exports.

The post-1930 policies of protectionism and import-substitution industrialization drastically changed the relative income position of most Latin American countries. Whereas per capita income (real per capita GDP in dollars at 1965 factor cost) of the export-oriented Japanese economy increased nearly twelve fold between 1913 ($332) and 1985 ($3,952), and that of the United States more than tripled (from $1,358 to $4,569), that of Argentina less than doubled (from $790 to $1,417). Per capita income in Brazil (which increased almost tenfold between 1913 [$118] and 1985 [$1,114]), Chile ($1,137), and Venezuela ($1,199) has come close to that of Argentina. Trade liberalization schemes aim at accelerating the region's growth of income through closer integration into international trade.

As the statistics of Table 4 demonstrate, exports from Latin America and the Caribbean (LAC) to the world increased from $230 billion in 1995 to $578 billion in 2005. LAC exports to LAC countries as a percentage of exports to the world declined from 19.9 in 1995 to 16.7 in 2005. LAC exports to non-LAC countries increased from 80.1 in 1995 to 83.3 in 2005. The share of exports during the same years to the United States increased (from 80.1 to 83.3), to the European Union fell (from 16.9 to 13.8), to Japan fell (from 4.0 to 2.3), and to China increased (from 1.1 to 4.1). During the same years, as the statistics of Table 5 reveal, imports by LAC from the world increased from $260 billion to $533 billion. LAC imports from LAC countries as a percentage of imports from the world increased (from 18.1 to 20.1), and from non-LAC countries decreased (from 81.9 to 79.9; from the United States from 41.6 to 39.5, from the European Union from 19.1 to 15.0, and from Japan from 5.2 to 3.4; but imports from China increased from 1.3 to 4.3).

Tables 5 and 6 provide information with respect to the relative importance of primary (Table 5; agricultural, i.e., food and raw materials, and mining, i.e., ores and other minerals, fuels and nonferrous metals) and manufactured (Table 6; iron and steel, chemicals, other semi manufactures, machinery and transport equipment, i.e., automotive products, office and telecom equipment and other machinery and transport equipment, textiles, clothing and other consumer goods) products expressed as percentages of total exports from Latin America and the Caribbean for 1995 and 2000–2005. Primary products range between 49.9 (1995) and 58.8 percent and manufactured ones between 41.2 (2002) and 50.1 (1995) percent of total exports. Countries exporting mainly primary products include Barbados, Costa Rica, El Salvador, Haiti, Jamaica, Mexico, and the Dominican Republic. Countries exporting primarily manufactured products include Argentina, Belize, Bolivia, Chile, Colombia, Nicaragua, Panama, Paraguay, Peru, and Venezuela.

There is a strong ongoing debate in Latin America and the rest of the world about the costs and benefits of free trade and globalization. Satisfying the collective need for free internal and external trade can increase technological (producing output with the least expensive inputs) and allocative (producing the best combination of outputs with the least expensive inputs) efficiencies. In most countries, however, the benefits have accrued primarily to highly productive export sectors, their privately- or state-owned corporations, powerful trade unions, and skilled labor. Furthermore, both internal and external trade liberalization can carry, and have carried, high short- and medium-term transition costs in the form of increased unemployment, inequality, poverty and misery. The degree to which free trade (satisfaction of the collective economic need for free exchange in all input and output markets) increases technological and allocative efficiency in each country, and also increases the welfare of all inhabitants, depends on the degree to which the other collective needs for safety, security and protection of life and private and public property, equitable treatment by government, political freedom, social harmony, and environmental protection—also are satisfied. In other words, it also depends, on the one hand, on the degree to which a nation has attained procedural democracy (through satisfaction of the collective need for political freedom); and on the other hand, civil society (through satisfaction of the other collective needs).

No Latin American nation has as yet successfully created the economic, social and political conditions which could turn free trade into a reliable instrument of attaining universal, sustainable prosperity. By itself, free trade has been unable to lead to universal prosperity in the Americas. And without it, universal prosperity has remained a mirage. Cuba, Venezuela, Bolivia, and Argentina are, to varying degrees, against free trade. They are also forming their own trade bloc and distancing themselves from the rest of pro-free trade Latin American nations. Unless these aforementioned complementary collective needs are satisfied to similar degrees, free trade by itself cannot lead, and has not led, to technological and allocative efficiency, and a reduction in the historically high levels of relative inequality in total and labor incomes, as well as in educational, health, and other forms of capital endowments. The failure of Latin American countries to attain sustainable development, or deal effectively with its multiple problems of poverty, inequality, and underemployment, both during periods of relative free trade (1830–1930 and 1973-present) and protectionism (1930–1973), may be best understood in terms of the inability of their collective markets to attain high degrees of satisfaction of all these fundamentally complementary collective needs.

See alsoAgriculture; Andean Pact; Caribbean Common Market (CARIFTA and CARICOM); Central American Common Market (CACM); Chicago Boys; Economic Commission for Latin America and the Caribbean (ECLAC); Economic Development; Free Trade Area of the Americas (FTAA); Industrialization; International Monetary Fund (IMF); Labor Movements; Latin American Free Trade Association (LAFTA); Mining: Modern; Neoliberalism; North American Free Trade Agreement; Plantations; Prebisch, Raúl; World Bank.

BIBLIOGRAPHY

Balassa, Bela. "Outward Orientation." In Handbook of Development Economics, vol. 2, edited by Hollis Chenery and T. N. Srinivasan. Amsterdam and New York: North-Holland, 1989.

Bruton, Henry. "Import Substitution." In Handbook of Development Economics, vol. 2, edited by Hollis Chenery and T. N. Srinivasan. Amsterdam and New York: North-Holland, 1989.

CEPAL Review. Santiago: United Nations, Economic Commission for Latin America and the Caribbean (ECLAC), 1976–.

Cole, Harold L., Lee E. Ohanian, Alvaro Riascos, and James A Schmitz, Jr. "Latin America in the Rearview Mirror." Journal of Monetary Economics 52:1 (2005), 69-107.

Díaz Alejandro, Carlos F. Essays on the Economic History of the Argentine Republic. New Haven, CT: Yale University Press, 1970.

Ground, Richard Lynn. "The Genesis of Import Substitution in Latin America." CEPAL Review 36 (December 1988), 179-203.

Latin America and the Caribbean: Selected Economic and Social Data. Washington, DC: United States Agency for International Development (USAID), 2006.

Levin, Jonathan V. The Export Economies: Their Pattern of Development in Historical Perspective. Cambridge, MA: Harvard University Press, 1960.

Lewis, Stephen R., Jr. "Primary Exporting Countries." In Handbook of Development Economics, vol. 2, edited by Hollis Chenery and T. N. Srinivasan. Amsterdam and New York: North-Holland, 1989.

Lord, Montague J. "Latin America's Exports of Manufactured Goods." In Economic and Social Progress in Latin America. Washington, DC: Inter-American Development Bank, 1992.

Maddison, Angus. "Economic and Social Conditions in Latin America, 1913–1950." In Long-Term Trends in Latin American Economic Development, edited by Miguel Urrutia. Washington, DC: Inter-American Development Bank, 1991.

Mamalakis, Markos. "The Export Sector, Stages of Economic Development, and the Saving-Investment Process in Latin America." Economia Internazionale 23, no. 4 (1970), 283-307.

Mamalakis, Markos. "The Role of Government in the Resource Transfer and Resource Allocation Processes: The Chilean Nitrate Sector, 1880–1930." In Government and Economic Development, edited by Gustav Ranis. New Haven, CT: Yale University Press, 1971.

Mamalakis, Markos. The Minerals Theory of Growth: The Latin American Evidence. Göttingen, West Germany: Ibero-Amerika Institut für Wirtschaftsforschung, 1978.

Mamalakis, Markos J. "Social Justice in a Global Environment: A Theory of Natural Law and Social Justice." In The Quest for Social Justice III: The Morris Fromkin Memorial Lectures 1992–2002, edited by Peter G. Watson-Boone. Milwaukee: UWM Libraries, University of Wisconsin—Milwaukee, 2005.

Mamalakis, Markos J. "Sustainable Democracy and the Golden Rules." Global Currents, Center for International Education, University of Wisconsin—Milwaukee, 1:2 (Spring 2005), 18-19.

Statistical Yearbook for Latin America and the Caribbean. Santiago: United Nations Commission for Latin America and Caribbean (ECLAC), 2006.

Wilkie, James W., ed. Statistical Abstract of Latin America, vol. 30, part 2. Los Angeles: Latin American Institute, University of California, Los Angeles, 1993.

                         Markos J. Mamalakis

TRADE, FOREIGN

TRADE, FOREIGN. The United States throughout its history has been relatively self-sufficient; yet foreign trade has, since the colonial period, been a dominant factor in the growth of the nation. The colonies were founded basically for the purpose of commerce: the shipment of products, particularly raw materials, to the mother country and the sale of finished goods from the shops of England in the colonies. Even had colonial plans not been centered around the welfare of Englishmen at home, the results could scarcely have been different. The Atlantic coast is particularly suited to commerce on the high seas. Deep harbors in the North and bays, indentations, and rivers and smaller streams from New York southward provided excellent ports for loading and unloading the ships of the day. Moreover, the settlements, clustered around the places where the ships came in or scattered along the rivers and creeks, were almost completely isolated from each other. As late as 1794 it took a week (under the most favorable conditions) to make the trip by coach from Boston to New York. Although the seas were infested with privateers and pirates (and the distinction was sometimes a thin one) and the ships were small and the journey long, the hazards of overland trading were still greater and the returns more uncertain.

Foreign trade was primarily in outgoing raw materials and incoming manufactured goods during the colonial period. Simple economic necessity had turned the colonists to agriculture. When surplus food production became possible, economic specialization appeared. Dictated by climatic and soil conditions, as well as by a host of other factors, production in each section determined the course of its commerce. The trade of the colonies south of Pennsylvania was chiefly with England. Ships from British ports called at the wharves of plantations along the rivers of Maryland and Virginia for tobacco and the next year returned with goods ordered from the shops of London and other cities. Furs, skins, naval stores, and small quantities of tobacco made up the early cargoes that went out from the Carolinas, but after 1700 rice quickly gained the lead as the most important export. Before the middle of the century indigo had become a profitable crop not only because it offered employment for the slaves when they were not busy in the rice fields but also because the demand for the dye in England had induced Parliament to vote a bounty. On the eve of the Revolution indigo made up by value about 35 percent of the exports of South Carolina.

The commerce of New England and the middle colonies ran counter to economic plans of empire. Grain, flour, meat, and fish were the major products of Pennsylvania and New Jersey and the colonies to the north. Yet shipment of these materials to England endangered long-established interests of Englishmen at home. Although small amounts of naval stores, iron, ship timbers, furs, whale oil and whalebone, oak and pine plank, and staves, barrels, and hoops went off to London, other markets had to be sought in order to obtain means of paying for the large amounts of goods bought in England. The search for sales brought what is often referred to as the triangular trade. Southern Europe, Africa, and the West Indies bought 75 percent of the exports of New England and more than 50 percent of those of New York and Pennsylvania.

On the eve of the Revolution the middle colonies were shipping annually to southern Europe more than 500,000 bushels of wheat and more than 18,000 tons of bread. Fish, meat, grain, ship timbers, lumber, and materials for barrels, kegs, and casks also went out in large quantities from Pennsylvania, New York, and New England. Rum was exchanged in Africa for slaves, and the slaves in turn sold in the West Indies for specie or for more molasses for New England rum distilleries. These islands, in fact, provided an inexhaustible market for fish, meat, foodstuffs, and live animals, as well as pearl ash, potash, cut-out houses, lumber, and finished parts for making containers for sugar, rum, and molasses. Corn, wheat, flour, bread, and vegetables found their greatest outlet in the islands.

Unfortunately the sellers of raw materials—the colonists—were almost always in debt to the manufacturers of finished goods—the British. Carrying charges by English shipowners ate up the favorable balance of the southerners, and the debts of the planters became virtually hereditary. Northern commercial men, selling more than they bought everywhere except in England, gained enough specie to settle their accounts in London with reasonable promptness. The persistent drainage of money to the mother country, however, was a significant factor in the discontent that developed in America.

Although the Revolution did not destroy American trade, even with the British, the former colonies obviously lost their preferred position in the world of commerce and also the protection of the powerful empire fleet. British trade regulations of 1783 (emphasized by further regulations in 1786–1787) closed the ports of the West Indies to the ships of the new nation and protected others by heavy tonnage duties. Only Sweden and Prussia agreed to reciprocity treaties. Yet this critical postwar period was far less discouraging than it is sometimes pictured to be. Varying tariffs in the ports and hostile action and counteraction among the states did keep commerce in perpetual uncertainty and prevented retaliation against European discriminations, but trade went on either in traditional channels or in new markets. Shipping interests in the new Congress secured legislation favoring Americanowned ships. The tonnage registered for foreign trade increased in the years 1789–1810 from 123,893 to 981,000, and imports and exports in American bottoms jumped roughly from about 20 percent to about 90 percent.

The Napoleonic Wars turned production forces to military goods, drove merchant ships from the seas, and pushed prices upward rapidly. Although many ships were seized, American merchant captains and the nation prospered until President Thomas Jefferson, seeking to maintain peace, induced Congress in 1807 to pass the Embargo Act. Exports dropped from $108.3 million to $22.4 million within a year; imports fell from $138.5 million to $56.9 million. Repeal of the embargo brought some revival, but other restrictions and the war against England drove exports to $6.9 million in 1814 and imports to $12.9 million.

Foreign trade in the years between 1815 and 1860, though fluctuating often, moved generally upward. Agricultural products made up the major part of the exports. Cotton led all the rest—production mounted from about 200,000 bales in 1821 to more than 5 million in 1860,80 percent of which was sold abroad. Great Britain and France were the two greatest purchasers, but Germany, Austria, Belgium, Holland, and Russia bought appreciable quantities. The West Indies and South America took large amounts of grain and flour, and English demands increased steadily after the repeal of the corn laws in 1846. Tobacco, rice, meat, and meat products, as well as lumber,

naval stores, barrels and kegs, staves, and hoops moved out in large quantities. Cottons, woolens, silks, iron, cutlery, china, and a miscellany of other items made up the bulk of the incoming cargoes. But the glory of the clipper ship was being obscured by the iron-hulled steamers that came from the British shipyards; the day of the whalers was ending even before oil began to flow out of the first well at Titusville, Pa., in 1859.

As the nation became increasingly industrialized between the Civil War and World War II, domestic production and domestic trade were its basic concerns. Railroads knit marketing centers together and economic specialization reached maturity. Agriculture, spreading into the West, increased each year its outpouring of foodstuffs; and industry, entrenched behind a high protective tariff, grew with astounding rapidity. The American merchant marine declined rapidly as investors turned their dollars into railroads and other industrial ventures at home. The percentage of foreign trade carried in American bottoms decreased from 66.5 percent in 1860 to 7.1 percent in 1900. That did not mean, however, any lessening in total ocean commerce. The value of exports and imports combined rose from $686,192,000 in 1860 to $4,257,000,000 in 1914. Cotton, wheat, flour, and other farm products continued to move out in ever-larger amounts, but it was obvious that agriculture was losing out to manufactured goods. The changing nature of exports and imports clearly revealed the fact that Europe was becoming each year relatively less important in American foreign trade. Shipments to and from Asia, Oceania, Africa, Canada, and Latin America were growing rapidly.

World War I restored temporarily the supremacy of Europe as a consumer of American agricultural products. But new goods also made up large portions of the cargoes—chemicals, explosives, firearms, special woods for airplane propellers, barbed wire, and a host of other needs of fighting forces. The value of exports and imports more than doubled during the war. The huge purchases of the Allies were based on government credits in the United States, and the slow growth for the next decade was financed largely by American loans. The economic structure fell apart in 1929. Prices declined sharply everywhere; world credit and world finance broke down; foreign exchange transactions were curtailed or taken over completely by government in many places; and the principal powers sought to maintain themselves by hiding behind high tariffs, trade licenses, and fixed quotas. The United States had for a decade been shutting itself off from the world. The climax was reached in the Smoot Hawley Tariff of 1930, which brought retaliatory restrictions from other nations. Foreign trade of the nation dropped to $2.9 billion in 1932. The slow climb upward to $6.6 billion in 1940 was in part the result of the insistence of Secretary of State Cordell Hull that reciprocity agreements rather than trade restrictions were essentials in commercial revival. By authority of the Reciprocal Trade Agreements Act of 1934 he made a series of executive agreements with foreign nations by which he encouraged American trade, and, by applying the most-favored-nation clause, spread the gains widely over the world.

In the war years 1941–1945 more than $50 billion in goods went out of American ports, and $17 billion came in. But about $32.9 billion of the exports were lend-lease war materials to fighting allies and no payment was expected. That was a startling change in the customary creditor-debtor relationship following World War I, but the experiences of that war dictated the decision. The whole international economic structure was, in fact, undergoing a basic revolution.

By the end of the war production facilities had roughly doubled; the nature of the outpouring products had changed astoundingly; and the people of the nation in general and the agricultural and industrial working force in particular had not only found new homes but also new wants and new hopes.

Tired of rationing and eager for a new world, Americans were at the end of the war impatient with the delays in transforming the industrial plants from war goods to peace goods and intolerant of any threats of wage cuts. But reconstruction in the nation was slow. Shelves were long empty and shortages of many essentials developed. Europe was paralyzed, and multilateral trade had all but ended.

Fearful of communism and convinced that hunger must be eliminated if traditional nations were to be reestablished and if new ones were to be created on the principle of freedom of choice, the United States initiated (1947) the Marshall Plan, which, as proposed by U.S. Secretary of State George C. Marshall, provided $12 billion in aid for the economic recovery of Europe. Already American loans, credits, grants, and relief—private and public—had exceeded that amount by several billion dollars. The plan was not envisioned as a relief program but as a cooperative venture that would restore, or create, economic well-being for all. On 3 April 1948, President Harry S. Truman signed the European Recovery Act, which, through the Economic Cooperation Administration, headed by Paul G. Hoffman and a European coordinating body, the Organization for European Economic Cooperation, gave out through sixteen national offices in Europe and a mission in China at least $17 billion over a four-year period.

Machinery for regulating international monetary and trade relations had already been established by the end of the 1940s. The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank) had been created at a meeting in Bretton Woods, N.H., in 1944. The General Agreement on Tariffs and Trade (GATT), with authority to agree on tariff rates in the free world, floundered for a while but became firmly established by late 1947.

If the 1940s were years of destruction and reconstruction, the 1950s were, throughout the free world, years of growth and of adjustments in a transition from a basically nationalistic thinking concerning tariffs and trade to a basically international philosophy of freedom of world commerce from deadening restrictions. The experiences of the Great Depression and World War II turned thoughts earnestly toward free trade. Led by the social philosophers and economists the movement gained remarkable headway, even among political leaders.

Conscious of the disadvantages of small and sometimes jealous countries in building an industrial structure and in bargaining with great nations, such as the United States and the Soviet Union, Europe turned to unity. Assuming an independent stance, although still drawing appreciable amounts of U.S. aid, France, Belgium, West Germany, Luxembourg, Italy, and the Netherlands in 1957 formed the European Economic Community (EEC), most often referred to as the Common Market. Since the primary purpose of the organization was to improve the economy of all the members by throwing a common barrier around the whole and harmonizing restrictions within, various interests in the United States, especially farmers, were deeply concerned.

Within three years after the formation of the Common Market, Great Britain, Sweden, Norway, Denmark, Austria, Switzerland, and Portugal formed the European Free Trade Association (EFTA). (Finland became an associate member in 1961.) With the United States and Canada, the groupings came to be called the Atlantic Community.

But not all was harmony in the new economic community. The mercantilists quarreled with the tariff reformers everywhere, and in the United States there was opposition to shifting control of tariff rates from Congress to an international body. The decade of the 1960s was at times a period of bitter controversy. President John F. Kennedy early in 1962 requested Congress to delegate some of its authority over tariffs to the executive department so that he might make revisions at home and might, in the meetings of GATT, bargain for ends that would further the trade of all of the countries involved. The Trade Expansion Act of 1962 granted much authority to the president, notably the power to reduce tariffs on a linear basis by as much as 50 percent on a most-favored-nation basis.

American delegates and officials of the Common Market, who were determined to assert themselves politically and economically, gathered in Geneva in 1964, in what is called the Kennedy Round of the GATT discussions. The ministers of the various countries had met the year before in a somewhat vain effort to work out ground rules for the proceedings. Agreements concerning rates on even the simplest industrial groups were troublesome to reach, and reductions in agricultural tariffs were arrived at—if at all—only with great difficulty. After nearly four years of controversy, the meeting adjourned with average tariff rates lowered to somewhere between 35 and 40 percent. Many industrialists and laborers in the United States, wholly dissatisfied, returned to protectionism. Members of the Common Market were unhappy in many ways also, but obviously pleased that they possessed the power to challenge the United States.

The foreign trade of the United States had undergone profound changes. The great surpluses that had marked U.S. world commerce from the 1870s began in the 1950s a decline that reached significant proportions in the 1960s. The great steel empire that Andrew Carnegie and Henry Clay Frick had done much to make the wonder of the industrial world was crumbling because of new mills and less costly labor in other countries. Freighters put into ports on the Atlantic, the Pacific, and the Gulf and even traveled down the Saint Lawrence Seaway to Cleveland, Detroit, and Chicago to unload finished industrial goods in the heart of America. As Europe and other countries of the free world made a remarkable recovery from the war years, products from their new plants poured into the stream of international commerce. Between 1960 and 1967 finished goods in U.S. imports increased 150 percent. Steel, automobiles, textiles, and electronic goods led the new imports. Incoming steel, until 1957, was insignificant in amount and had grown only to some 3 million tons in 1960. But by 1967 shipments had reached 11.5 million tons, and the next year reached 18 million. In 1971 steel imports amounted to 18.3 million tons—nearly 18 percent of all steel sold in the nation that year, when total employment in American mills also fell to its lowest point since 1939.

Competing steelmaking plants, although new, were not appreciably more efficient than those of the United States. Basically the steel problem was too much steel. Production facilities over the world were far in excess of need; yet Japan, for instance, although having to both bring in raw materials and send its finished product to faraway markets, ever increased its output. Even production in Mexico, South Korea, Spain, and the Philippines, for example, grew steadily as capacity outside the United States doubled in the 1960s.

American steelmakers were both unwilling and unable to bargain in the marketplace. They blamed cheap labor (the European advantage, they asserted, was about $20 a ton; the Japanese roughly twice that amount) and liberal governmental assistance in the form of border taxes, license requirements, special levies, quotas, export rebates, hidden subsidies, value added tax, and other monetary and legislative provisions for hindering exports from the United States and encouraging exports to the United States. They turned to Congress for help. Both European and Japanese producers agreed to limit further shipments of steel for the next three years to an annual growth of 2.5 percent.

The automobile industry was turned topsy-turvy also. Large British and French cars—once popular as prestige vehicles—steadily declined among American imports as small European cars, encountering little American competition, began to appear in ever-larger numbers in the United States. Only in the export of trucks, buses, and automotive parts and equipment did the United States keep the unfavorable trade to a reasonable limit in the automotive field.

Textile and footwear manufacturers, too, protested the loss of markets because of competing goods from other countries, especially Japan. Some agreements were reached concerning shipments of cotton cloth into the United States, but the whole field of synthetic fibers remained open. Between 1965 and 1969 American imports of man-made fiber textile increased from 79 million pounds to 257 million pounds. During the same period imports of wearing apparel of man-made fibers grew from 31 million pounds to 144 million pounds. The number of imported sweaters rose from 501,000 dozen in 1965 to about 6.9 million dozen in 1969. Imports of footwear were increasing also: 96 million pairs in 1965; 202 million pairs in 1969. In the first four months of 1970, one-third of the demand for footwear was being met by foreign shops.

Electronic goods in foreign trade added appreciably to the deficit in the United States. Between 1963 and 1970 such imports, by value, mostly from Japan, increased at the annual rate of 32 percent. By 1970 they accounted for 37 percent of the television sets, 63 percent of the phonographs, 92 percent of the radios, and 96 percent of the tape recorders sold in the United States—though some of the parts were made in American plants or in Americanowned foreign plants. Even the developing countries exported local products, including tropical fruits and novelties, and such substantial products as special steels.

The basic problem in American foreign trade in the early 1970s was that imports had increased more rapidly than exports. Building on the foundation of American aid after World War II, and to an appreciable extent on borrowed American technology, Europe and parts of Asia performed an industrial miracle and captured markets over the world, especially in the United States, with their well-made goods. Moreover, the United States, suffering from persistent inflation and its consequent high prices, could not effectively compete in world markets. Imports were cheap in comparison with domestic prices, and foreign goods flowed freely into the ports.

Many industrialists and wage earners in the United States resented the economic penalties they thought the changing foreign trade situation had brought. During the 1960s ever-increasing numbers of U.S. corporations and individuals set up factories throughout the world. Some said they were fleeing behind the protective walls that prevented Americans from selling in many world markets; others said they were escaping the high wages at home that choked them out of world competition; a few said they were getting away from the irresponsible American workmen. Discontent in the nation continued to grow, and American industrialists and laborers and a great number of other citizens, convinced that the whole international experiment had been a failure, turned to protection. Arguments by theoretical scholars and realistic statisticians that free trade had created more jobs than it had destroyed and that a return to the old order would bring economic tragedy were unconvincing to factory owners with limited markets or to men without jobs.

American foreign trade was involved not only in the complex industrial world but also in the even more complex monetary world. The annual unfavorable balance of payments, sometimes of several billion dollars, made it difficult for the nation to pay its bills. The merchandise exchange was with few exceptions favorable to the United States; it was the balance of payments that embarrassed the nation. Military commitments in Europe and elsewhere, the Vietnam War, heavy expenditures of American tourists abroad, shipping charges, and a host of other payments left the nation each year through the 1960s and at the beginning of the 1970s heavily indebted. This debt steadily increased the claims on the gold reserves of the United States and brought an ever-growing doubt concerning the dollar.

The essential monetary difficulty was not so much the problem of gold as it was the problem of adjusting the existing monetary system to the needs of the new international situation and the overvalued dollar—the only currency in the free world with a fixed value based on a specific amount of gold. (The designers of the IMF at Bretton Woods had set up that standard with all other currencies having a parity relation to it. There was a modest permissible variation in the rate of exchange.) If, however, the unit value of any currency became too cheap or too expensive in terms of other currencies, it could be devalued or revalued upward to be realistically realigned with the dollar. In the 1960s most of the currencies of the major countries had become greatly undervalued in terms of the dollar, notably the West German mark and the Japanese yen. Thus imports were temptingly cheap in American ports, and exports discouragingly costly in foreign markets.

Through the 1960s U.S. imports grew twice as fast as exports, and the small trade surplus fell each year far short of meeting the persistent foreign debt. Dollar claims piled up in Europe. In 1968 additional reserves (often referred to as paper gold) were provided by the creation of Special Drawing Rights issued by the IMF. But the imbalance continued. There was no lack of suggested remedies: devalue the dollar; increase the price of gold; widen the parity margin; float all currencies; desert gold altogether. Each proposal stirred some doubts, and each one presented a plethora of known and unknown difficulties. As the 1970s began, there was no question that the dollar was under tremendous pressure.

The impending crunch came in August 1971, when higher interest rates in the United States, rumors of revaluations, and a growing American deficit, swelled by strikes and threatened strikes, poured a flood of unwanted dollars into Europe. Speculators, corporations, commercial banks, and other holders, protecting themselves from changes in currency values, began to scurry out from under their surplus dollars. They returned to the United States $4 billion in the second week of August. The nation at the time held only $13 billion in its gold reserve against some $60 billion in short-term obligations. On 15 August President Richard M. Nixon closed the door on gold redemptions and levied a 10 percent surtax on dutiable imports. The drastic action, it was hoped, would force Japan and the major European countries to revalue their currencies upward, remove some of their manifold barriers to United States trade, and share the costs of American military forces stationed abroad. Despite many fears that the action might disrupt the monetary world, the situation cleared appreciably, although the bitternesses that had long existed did not disappear.

By February 1972 the monetary situation had begun to deteriorate rapidly. Fearful that Congress, dissatisfied with promised trade concessions from the Common Market, Canada, and Japan, would severely amend the devaluation proposal, Europe began to enact currency controls. American foreign trade throughout the year remained the largest in the world, but exports made no appreciable gains on imports. The surtax, soon removed, had not lessened appreciably the amount of goods coming into American ports. Tariff walls had come down, but other barriers had gone up.

The dollar, devalued again in February 1973 and further deteriorated through the succeeding currency float, continued to decline relative to the currencies of the Common Market and Japan. A gasoline shortage developed with the oil embargo of October 1973, and by the early months of 1974 the economic situation was recognized by even the most optimistic as a full-blown depression, with further unemployment but no end to inflation. Quarrels in the free world intensified as the United States established détente with the Soviet Union and offered a friendly hand to China. Sales of grain to the Soviets, reductions in military and other world expenditures, augmented returns from foreign investments, and other favorable factors pushed the balance of trade substantially in favor of the United States by the beginning of 1976.

Between the 1970s and the mid-1990s the U.S. post–World War II dominance of world trade came to an end. Major changes in transportation, finance, corporate structures, and manufacturing restructured the global economy, erasing the significance of international economic boundaries. Whole industries in the United States were largely eliminated, unable to compete effectively against cheaper and often better imports. In labor-intensive industries, such as textiles, shoes, and assembly work, the competition came from low-wage developing countries; in the automobile, steel, and electronics industries it came from technological innovators abroad who developed new products and efficient manufacturing.

The United States continued to be the world's largest internal economic market, but this did not isolate the United States from international trade, as it willingly imported goods and services and eagerly exported goods and know-how. The United States sought a role in the global economy, as evidenced by the North American Free Trade Agreement (NAFTA) and major revisions in the General Agreement on Tariffs and Trade (GATT). NAFTA, which became effective in January 1994, created a major regional trading block including Canada, the United States, and Mexico. This far-reaching agreement reduced tariffs over a fifteen-year period, eased cross-border transportation, and opened Mexico to U.S. and Canadian investments, even in banking and state-owned energy monopolies. Labor unions opposed NAFTA, asserting that corporations would transfer jobs and plants to Mexico because of lower wages and lax environmental regulations. GATT negotiations were protracted. Revisions were negotiated by three presidents—Ronald Reagan, George Bush, and Bill Clinton—who supported cutting tariffs among 123 nations. The GATT agreement known as the Uruguay Round reduced tariffs by 40 percent, cut agricultural subsidies, extended patent protection, and set out rules on global investment. Disputes were to be resolved by the World Trade Organization (WTO), a powerful arbitration board that would decide whether a nation's domestic laws violated the agreement.

The arguments for trade liberalization through NAFTA and GATT were the classic economic arguments of comparative advantage originally articulated by the early nineteenth-century British economist David Ricardo. The idea was simple—nations should specialize in products they can produce cheaper or better. Deciding what products that would mean for the United States was problematic. The last U.S. trade surplus (U.S. exports exceeding imports) occurred in 1975, when the nation enjoyed a $12.4 billion surplus. By 1984, however, the United States was posting $100 billion-plus trade deficits each year, reaching a record $166 billion in 1994. The trade deficit is a summary statistic for a more complicated set of relationships that includes country-to-country deficits and surpluses and differences between economic sectors. In 1993, for example, the United States ran a trade surplus of $12.8 billion for foods, feed, and beverages but had large deficits in automotive vehicles ($50 billion) and consumer goods ($79.4 billion).

U.S. productivity lost its advantage when other industrializing nations used new technologies and lower wages to gain access to the vast U.S. market, outcompeting domestic manufacturers. A television-addicted nation sat glued in front of foreign-produced sets. The last U.S. television factory—operated by Zenith Electronics Corporation in Spring field, Mo.—closed in 1992, leaving more than 1,300 workers jobless when production shifted to Mexico. Japan cut into several consumer markets—electronics, cameras, computers, automobiles. Japanese brand names became household words: Sony, Mitsubishi, Toyota, Nissan, Honda, Hitachi, Mazda, Sharp, Canon, Panasonic. The United States turned to quotas to stem Japanese imports. Japan responded by opening plants in the United States that employed U.S. workers but still diverted dollars abroad.

Labor unions urged the public to "buy American," but identifying the products was far from easy. A car "made in America" contained components built in more than a dozen countries on three continents and ultimately assembled in a U.S.-based factory. Was the car American made? A General Motors executive in 1952 testified before Congress: "What is good for the country is good for General Motors." The reasoning no longer held as GM moved jobs and facilities to East Asia or to Mexican plants along the U.S. border. Displaced from well-paying jobs, U.S. workers and managers found reentering the workforce difficult. Even in a growing economy, new jobs paid less. The Census Bureau found that workers who left or were laid off between 1990 and 1992 saw their weekly wages fall 23 percent when they regained employment, often without health insurance and other benefits.

The international economy developed an infrastructure of transportation, financing, and communications that made the movement of money, information, and goods easier and cheaper. Corporations moved money around the world to finance trade, protect against currency fluctuations, or to seek higher returns on investments. Meanwhile U.S. individual and institutional investors looked overseas for investments, often financing enterprises that competed against U.S.-based companies. Huge amounts of capital that otherwise might have been invested in domestic companies found its way abroad into emerging markets in Eastern Europe, Latin America, and the Pacific Rim. Money could be moved instantaneously around the world. Capital's loyalties were not to governments or domestic economies but to the best rate of return.

Making the United States competitive internationally was easier to advocate than accomplish. It put pressures on corporations to reduce employment and improve production. Problems created in the United States by trade liberalization remained largely unaddressed by the end of the 1990s. For the public, trade liberalization was complicated and confusing, with contradictions that were difficult to explain or accept. If trade agreements were good for the nation, why were jobs lost and industries hurt? In 1994 the United States displaced Japan as the world's most competitive economy, based on an annual index by the World Economic Forum. The international economy subjected the U.S. labor force to new economic pressures—job insecurity, stagnant wages for nonskilled labor, and fewer company-sponsored benefits, particularly health insurance. U.S. wage rates were substantially lower than those in Germany and Japan, but within the United States something else occurred—a long-term trend of widening income inequality between the nation's rich and the poor and middle classes. Meanwhile, the domestic economy was transforming itself, moving from an industrial age to the information age, one for which many workers were ill prepared. The questions were how many high-tech, well-paying jobs could the economy realistically create and how could those stuck in low-wage jobs in the growing service section support themselves and their families.

BIBLIOGRAPHY

Audley, John J. Green Politics and Global Trade: NAFTA and the Future of Environmental Politics. Washington, D.C.: Georgetown University Press, 1997.

Buchanan, Patrick J. The Great Betrayal: How American Sovereignty and Social Justice Are Sacrificed to the Gods of the Global Economy. Boston: Little, Brown, 1998.

Dunkley, Graham. The Free Trade Adventure: The WTO, the Uruguay Round, and Globalism, a Critique. New York: St. Martin's Press, 2000.

Ferguson, Niall. The Cash Nexus: Money and Power in the Modern World, 1700–2000. New York: Basic Books, 2002.

Friedman, Thomas L. The Lexus and the Olive Tree: Understanding Globalization. New York: Anchor Books, 2000.

Hufbauer, Gary C., and Jeffrey J. Schott et al. NAFTA: An Assessment. Washington, D.C.: Institute for International Economics, 1993.

Krugman, Paul R. The Age of Diminished Expectations: U.S. Economic Policy in the 1990s. Cambridge, Mass.: MIT Press, 1990.

Pomfret, Richard W. T. International Trade: An Introduction to Theory and Policy. Cambridge, Mass.: Blackwell, 1991.

Yergin, Daniel. Commanding Heights: The Battle between Government and the Marketplace That Is Remaking the Modern World. New York: Simon and Schuster, 1999.

James A.Barnes

BrentSchondelmeyer/a. g.

See alsoDollar Diplomacy ; Foreign Investment in the United States ; Imperialism ; Latin America, Relations with ; Most-Favored-Nation Principle ; Pan-American Union ; Reciprocal Trade Agreements ; South America, Relations with ; Treaties, Commercial .

Trade, Foreign. This essay on foreign trade as an instrument of foreign and defense policy is divided into three sections: Wartime provides an overview of the role of foreign trade in U.S. strategic and economic policies in wartime; Trade Restrictions examines the use of embargoes and economic sanctions as instruments of U.S. security policy against hostile nations; and Neutral Trade explores America's assertion of commercial rights when it was a neutral nation affected by other countries' wars.
Trade, Foreign: Wartime The drive for American national economic security has existed since 1776, and foreign trade has played a strategic and economic role in U.S. policy. The interaction of commerce and defense was necessary and obvious. Historians have long argued over the relative importance of economic and strategic concerns in foreign policy, with revisionists emphasizing the profitability of trade expansion and realists stressing strategic defense imperatives. Regardless of this debate, the trade/security linkage has prevailed throughout the nation's history.

International commerce was central to the American search for independence in the Revolutionary War. The alliance with France, 1778–1800, allowed trade to serve political purposes. As president, George Washington perceived national security in terms of commercial relations and a military establishment, not entangling alliances, yet trade discrimination, mercantilism, and pirates threatened the security of the new nation. In response, Secretary of State Thomas Jefferson issued a Report on Commerce in 1793 that would reflect trade ideology for the next two centuries. Recommending specialization at home, Jefferson demanded reciprocity treaties and equal access to markets abroad to enhance national defense. American commerce flourished in the early nineteenth century, but was inevitably vulnerable to reprisals from warring Europeans. Terminating the commercial alliance with France in 1800, the country still developed North Atlantic and western frontier trade. Neutrality and trade expansion collided with British maritime coercion and led to mutual sanctions. The nearly disastrous War of 1812 convinced U.S. policymakers further that trade and military power were complementary.

Although American diplomacy was “altogether, of a commercial character,” as the historian Theodore Lyman wrote in 1828, the dimension of power was integrated into the trade/security formula in the late nineteenth century. While it still neglected the merchant marine fleet, the government funded a modern navy in the 1880s to promote commercial penetration overseas. Seapower and vigorous trade were complementary, wrote Alfred T. Mahan in promoting American greatness through imperialism, and pursuit of an interoceanic canal became part of this equation. By 1890, tariff policy shifted from protectionism to export expansion through reciprocity treaties as a way to boost American power. And trade and security—essential elements of international status—fused after the Spanish‐American War of 1898, as America acquired territories in the Caribbean and stepping‐stone islands across the Pacific to the fabled China market.

Officials did not necessarily elevate trade over diplomatic issues, yet they understood that trade policy meshed with global strategic objectives. President Theodore Roosevelt recognized the limits of American power in Asia, for instance, but viewed export growth as a component of military might, industrial strength, and domestic social order. Maintaining a balance of power in Europe, predominance in Latin America, and a presence in Asia all hinged on expanding and defending trade routes to U.S. possessions and markets. The building of the Panama Canal exemplified this coupling of commerce and security.

By World War I, this bond was inseparable. President Woodrow Wilson's Fourteen Points proposed that peace and prosperity could exist only by equal access to markets and an end to trade conflict. In the 1920s, American officials such as Secretary of Commerce Herbert C. Hoover also realized that America depended on foreign supplies of raw materials for its industrial production, which strengthened the country's military. Oil imports, for instance, became a priority. Thus, the commercial retaliation of the early depression gave way to mutually beneficial negotiations under the Reciprocal Trade Agreements Act of 1934, the brainchild of Secretary of State Cordell Hull. Protectionism led to political strife, he claimed, and his proof was that no trade agreement signee ever fought America. In the movement toward World War II, the administration of Franklin D. Roosevelt looked on German trade autarchy as a threat to U.S. commerce and peace, while American security required an export embargo to slow Japanese aggression in Asia. By the end of World War II, Washington planned for a cooperative, multilateral trade system based on nondiscriminatory commercial practices as the economic means to assure peace and security.

Multilateralism was a pillar of national security policies in the Cold War. With unparalleled economic power, America forged a trade system under the General Agreement on Tariff and Trade (GATT) in 1947 that boosted the recovery and prosperity of its Cold War allies. GATT promoted trade liberalization among the capitalist nations, strengthened their economies, and thereby brought them political stability, rendering them invulnerable to Soviet penetration. Liberal trade with American allies, and commercial restrictions against Communist rivals, were hallmarks of the Cold War until the demise of the Soviet bloc by 1991. Every president since Harry S. Truman has pursued liberal trade as a weapon against aggression and instability. Multilateralism built world trade equilibrium and interdependence among like‐minded nations, continuing the service of trade to security imperatives.

Bibliography

Cordell Hull , The Memoirs of Cordell Hull, 1948.
Peggy Liss , Atlantic Empires: The Network of Trade and Revolution, 1713–1826, 1983.
William H. Becker and and Samuel F. Wells, Jr. , Economics and World Power: An Assessment of American Diplomacy Since 1789, 1984.
Robert Pollard , Economic Security and the Origins of the Cold War, 1945–1950, 1985.
Walter LaFeber , The American Search for Opportunity, 1865–1913, 1993.

Thomas W. Zeiler

Bibliography

Stuart L. Bernath , Squall Across the Atlantic: American Civil War Prize Cases and Diplomacy, 1970.
U.S. Congress, House Subcommittee on International Trade and Commerce of the Committee on International Relations , Trading with the Enemy: Legislative and Executive Documents Concerning Regulation of International Transactions in Time of Declared National Emergency, 1976.
Richard J. Ellings , Embargoes and World Power: Lessons from American Foreign Policy, 1985.
Reginald Horsman , The Diplomacy of the New Republic, 1776–1815, 1985.
Philip Funigiello , American‐Soviet Trade in the Cold War, 1988.
Homer Moyer, Jr., and and Linda Mabry , Export Controls as Instruments of Foreign Policy: The History, Legal Issues, and Policy Lessons of Three Recent Cases, 1988.

Thomas W. Zeiler

Bibliography

Louis Martin Sears , Jefferson and the Embargo, 1966.
Jeffrey J. Safford , Wilsonian Maritime Diplomacy, 1913–1921, 1978.
Robert Dallek , Franklin D. Roosevelt and American Foreign Policy, 1932–1945, 1979.
Kathleen Burk , Britain, America, and the Sinews of War, 1914–1918, 1985.
Robert W. Tucker and and David C. Hendrickson , Empire of Liberty: The Statecraft of Thomas Jefferson, 1990.

Thomas W. Zeiler

Foreign Trade

Sources

British Imports . The American Revolution ended the political connection between Great Britain and the United States, but few Americans wanted the economic ties that reached across the Atlantic to break. Britain was by far the most important trading partner of the United States both before and after the Revolution, although restoring trade relations was a difficult and lengthy process. The British were eager to resume trading with America after 1783 because that was their main market

EXPORTS OF AGRICULTURAL PRODUCTS, 1791-1815

for manufactured goods. Consumer demand for those goods had built up over the revolutionary period. As fighting ended, imports resumed, and merchants rushed to provide clothing and fabrics, tableware, books, cook-ware, tools, and other manufactured goods, as well as some raw materials such as copper and lead. British merchants readily extended credit to their American correspondents, further helping sales. British imports quickly approached the prewar level.

Exports . Relying on Britain for consumer products was in the interest of individual Americans wanting cheaper and better products, but not for the development of the American economy. The Treaty of Paris allowed Americans to export manufactured goods to Britain, but there was a limited market for the few goods produced in the United States. Most American exports were agricultural products, and tobacco was the most important of these. Thomas Jefferson estimated in 1787 that tobacco accounted for one-third of America’s exports. Tobacco production declined in the 1780s, hurt by low prices in Britain. A shortage of slave labor after 1783 also lowered the production of tobacco, as well as rice and indigo, two other major exports. Sales of naval stores plummeted as well, in the short peace before the wars of the French Revolution began. Other exports also declined: fish, furs, and whale products. American manufacturing grew slowly at first, hampered by the ready availability of British goods on both sides of the Atlantic and the high costs of starting new enterprises in America. What material was produced, such as pig iron, tended to be consumed in the United States, and so sales did not help the American balance of trade. In 1784 British exports to the United States totaled £3.6 million sterling, five times the value of American exports to Britain.

Restricted Trade . The British made the Americans’ trade imbalance even more pronounced by actions that directly struck at American economic growth. On 2 July 1783 the British government issued Orders in Council that banned American ships from the British West Indies, a major market for American fish, timber, and agricultural products. A significant portion of the pre-1775 American economy was based on the “carrying trade,” as American ships carried goods to or from Britain and its other colonies, and closing the West Indies hurt that portion of the shipping industry. The British also continued to occupy military posts in the area of the Great Lakes, although by treaty they had given up that area, insisting that the United States repay prewar debts to British creditors and compensate Loyalists whose property had been confiscated. The British presence in the West was a constant irritant to the United States. It interfered with American fur trading, farming, and other economic activities west of the Appalachian Mountains and contributed to the bad feelings leading to the War of 1812.

New Markets. The Revolution and its aftermath also gave Americans the chance to develop new trading partners besides Britain. France, Spain, and the Netherlands all supported the American Revolution, in part with commercial treaties. After the war, trade with the French West Indies in the 1780s helped offset some of the loss of trade in the British West Indies. France had its own restrictive trade laws, however, banning most sales of American flour in the French Caribbean colonies in 1784. Spain was a less helpful trading partner and allowed Americans to trade with its colonies only by going through Spain itself. To further this mercantilist program, Spain closed the lower Mississippi River to American traffic in 1784, effectively blocking trade from the interior of the United States. American trade in the Mediterranean was also hampered, in this case by corsairs operating from the north coast of Africa. In 1787 Congress paid $30, 000 for a treaty with the sultan of Morocco to halt pirate raids, but this was only partly successful. In 1803 Congress appropriated money for warships, and two years later Americans made peace with Tripoli. This event helped secure the area for American trade, and the Mediterranean became an important market for American fish.

Orient . In addition to European markets, Americans began developing contacts in the Far East during the 1780s. The China trade gradually became an important part of the United States trading efforts and the basis for several family fortunes. Robert Morris, at the time the United States superintendent of finance, organized the first American trading expedition to China in 1783. The Empress of China left New York in February 1784, carrying forty tons of ginseng, a plant valued in China for its medicinal properties. It spent four months trading at Canton and returned in May 1785 with teas, silks, nankeens, china, and other desirable luxury goods formerly available only through Britain. The trip netted a profit of $37, 000, and other ships soon followed. Furs were highly valued by the Chinese, and beginning in 1787 a group of Boston traders formed a venture to send a ship westward to China, around Cape Horn, stopping in the Pacific Northwest for furs along the way. The Columbia was the first of these ventures, reaching Nootka Sound in what is today British Columbia in August 1788 and picking up otter pelts, and then going on to Canton and exchanging them for tea. This trade grew steadily, and in 1801 fifteen American ships brought $500, 000 worth of skins to China. Americans brought other goods to the Far East as well: in 1807 Boston merchant Thomas Handasyd Perkins began shipping opium from the Middle East to China. Even before the China trade began, Americans were already trading in the Indian Ocean in 1786. Fifty American ships visited Java in 1805, and twenty went to Sumatra. Dutch traders conducted the first American ship to visit Japan in 1797, although Americans failed to establish an independent trade with that country during this period.

Recovery. After the ratification of the Constitution, the American economy entered a period of growth and development, helped in part by the economic policies of the federal government. Some state governments had already taken action, as when New York, Massachusetts, Pennsylvania, Rhode Island, and New Hampshire enacted tariffs to raise the prices of imported goods and protect local industries in the 1780s. Secretary of the Treasury Alexander Hamilton proposed similar national measures in 1791, in his Report on Manufactures, which outlined a system of federal tariffs to protect young American industries. While the value of American manufactured goods rose during this period, they never rivaled the importance of agricultural exports. American foreign trade grew steadily after 1790, reflecting the industriousness of early Americans, although various international events were even more important in determining its growth. Before 1807 the war between England and France helped the American economy. The United States was neutral and was able to sell goods to parties on both sides of the conflict. American exports rose in value from $24 million in 1793 to $49 million in 1807. American shippers benefited as well since they were able to reexport goods first imported into the United States; this kind of trade rose in value from $2 million in 1793 to $60 million in 1807. After 1807 the war hurt the American economy, as attacks on American ships led to an embargo on shipping, which produced a serious depression lasting essentially to the end of the War of 1812. Although foreign trade grew steadily during the early national period, the United States never registered a trade surplus during these years. From 1790 to 1815 America exported goods worth $847 million and imported goods worth $1.2 billion, leaving a deficit of some $380 million. These figures do not take into account the value of American shipping, however, which likely more than made up for the shortfall.

Merchants . As had been true during America’s colonial period, foreign trade lay behind the growth of many large personal fortunes and sustained a class of wealthy merchants and their families, the elites of the early national era. Trade profits could be astounding. E. H. Derby Jr. made $100, 000 on the 1799–1800 voyage of his Mount Vernon to the Mediterranean. A typical venture to the East Indies earned a return of 20 percent. Traders reaped these returns by their willingness to take risks, and in this period the “Yankee trader” became well known for his shrewd assessment of business opportunities lost to more conservative investors. The need to make each opportunity pay was partly the result of circumstances. New England especially had few natural resources to export, and merchants quickly turned to trade, banking, insurance, and manufacturing. One example was the Boston Associates, led by Francis Cabot Lowell (who had already made a fortune from foreign trade). In 1814 Lowell and his partners built a textile mill in Waltham, Massachusetts, which was the first to combine spinning and weaving under one roof, a major advance in factory production. People such as the Lowells turned their own enterprise into their capital. They set the tone for the future economic development of the nation, and their desire to accumulate wealth made that development occur more quickly than in any other Western nation. Their success is marked in the corporations, banks, and charitable institutions they funded which still survive. We can even see their success in the homes they built along America’s seaboard in Salem, Boston, Philadelphia, Baltimore, and in New York City, where the mayor’s official residence is a mansion built in 1799 by shipper Archibald Gracie.

Sources

Thomas M. Doerflinger, A Vigorous Spirit of Enterprise (Chapel Hill: University of North Carolina Press, 1986);

Curtis P. Nettels, The Emergence of a National Economy, 1775–1815 (New York: Holt, Rinehart & Winston, 1962);

Douglass C. North, Economic Growth of the United States, 1790–1860 (Englewood Cliffs, N.J.: Prentice-Hall, 1961).

FOREIGN TRADE

Owing to its geographic size and diversity, Russia's foreign trade has always been relatively small, as compared to countries of Western Europe with whom it traded. Nevertheless, foreign trade has provided contacts with western technologies, ideas, and practices that have had considerable impact on the Russian economy, even during periods when foreign trade was particularly reduced. From earliest times Russia has typically traded the products of its forests, fields, and mines for the sophisticated consumer goods and advanced capital goods of Western Europe and elsewhere. Trade with Persia, China, and the Middle East, as well as more remote areas, has also been significant in certain times.

The first recorded Russian foreign trade contact was a treaty concluded in 911 by Prince Oleg of Kiev with the Byzantine emperor. During the medieval period most of the trade was conducted by gostiny dvor (merchant colonies), such as the Hanseatic League, resident in Moscow or at fairs at Novgorod or elsewhere. This practice was quite typical of the European Middle Ages because of the expense of travel and communication and the need to assure honest exchanges and payment.

During the early modern period Russian iron ore was very attractive to the British, but until the coking coal of Ukraine became available during the nineteenth century, Russia had to import much of its smelted iron and steel. Up to about 1891, when Finance Minister Ivan Vyshnegradsky raised the tariff, exports of grain and textiles did not suffice to cover imports, interest on previous loans, and the expenses of Russians abroad. Hence Russia had to depend on more foreign capital. Although Russia was known in this period as the "granary of Europe," prices were falling because of new supplies from North America. Nonetheless, Vyshnegradsky insisted, "Let them eat less, and export!"

One aspect of the state-promoted industrialization of 1880–1913 was an effort by the state bureaucracy to increase exports in support of the gold-backed ruble, introduced in 1897. To develop outlets for Russian manufactures, the next minister of finances, Count Sergei Witte, encouraged Russians consular officials to cultivate markets in China, Persia, and Turkey, where prior trade had been mostly in high-value goods such as furs. Witte's new railways, built for military purposes, made exchange of bulkier items economical for the first time. Subsidized sugar and cotton textiles would be sent to Persia and the East, with foreign competition foreclosed by prohibition on transit routes. Nonetheless, in 1913 fully sixty percent of Russian exports were foodstuffs and animals, another third lumber, petroleum, and other materials. Scarcely six percent were textiles, much of it from tsarist Poland. Russian imports were luxury consumer goods (including coffee and tea), equipment, and cotton fiber. Spurred by railroads, industrialization, and a convertible currency, foreign trade during the tsarist period reached a peak just before World War I with a turnover of $1.5 billion in prices of the time. This total was not matched after the Communist Revolution until the wartime imports of 1943, paid for largely by loans. Exports were approximately one-tenth of gross domestic product in 1913, a proportion hardly approached since. They were only four percent of GDP in 1977, for example.

Under the Bolsheviks, Russia conducted an offand-on policy of self-sufficiency or autarky. According to Michael Kaser's figures, export volumes rose steadily from five percent of the 1913 level in 1922 to sixty-one percent by 1931. When Britain signed a trade agreement in 1922 and others followed, the Soviet government began to buy consumer goods to provide incentives for the workers. They also bought locomotives, farm machinery, and other equipment to replace those lost in the long war years. Exports also rose smartly.

With the beginnings of planning at the end of the 1920s, however, trade fell off throughout the 1930s and the first half of the 1940s, reflecting extreme trade aversion and suspicions of western intentions on Josef Stalin's part, as well as the general world depression, which adversely affected Russia's terms of trade. Russia wanted to be as self-sufficient as possible in case war cut off its supplies, as indeed occurred from 1939 to 1945. Imports of consumer goods fell precipitously, but so did some important industrial materials that were now produced domestically. Since 1928, Russian exports have averaged only about one to two percent of its national income, as compared with six to seven percent of that of the United States in a comparable period. Imports showed a similarly mixed pattern, with imports much exceeding exports during the long war years.

After World War II, Russia no longer pursued such an extreme policy of autarky. Export volumes rose every year, reaching 4.6 times the 1913 level by 1967. But they were still less than four percent of output. The statistical breakdown of Soviet trade was often censored. Its deficits on merchandise trade account and invisibles were financed in unknown part by sales of gold and by borrowings in hard currency. The latter resulted in a growing hard-currency debt to western creditors from 1970 onward, amounting to an estimated $11.2 billion by 1978. Neglect of comparative advantage and international specialization has probably been negative for economic growth and consumer welfare.

During the post–World War II period, most Soviet merchandise imports and exports were traded with the other Communist countries in bilateral deals concluded under the auspices of the Council of Mutual Economic Assistance (COMECON). Even though trade with the developed capitalist countries of the West and with less developed countries increased throughout this era, USSR trade with other "socialist" states still exceeded fifty percent of the total in 1979, while the share of the West was about one-third. Trade with COMECON members was nearly balanced year by year, but when it was not, the difference was credited in "transferable rubles," a book entry that hardly committed either side to future shipments. Franklyn Holzman termed this feature of Soviet trade "commodity inconvertibility," as distinct from currency inconvertibility, which also characterized intra-bloc trade and finance.

Trade with the developed western capitalist countries was always impeded by the deficient quality of Soviet manufactured goods, including poor merchandising and after-sales service. Furthermore, western countries also discriminated against Soviet exports by their tariff and strategic goods policies. Even so, some Russian-produced articles, like watches produced in military factories and tractors, entered a few markets. More significantly, the USSR was able to export tremendous quantities of oil, gas, timber, and nonferrous metals such as platinum and manganese, as well as some heavy chemicals. Notable imports included whole plants for the production of automobiles, tropical foodstuffs, and grain during periods of harvest failure.

Foreign trade was always a state monopoly in the USSR, even during the New Economic Policy (NEP). Under the control of the Minister of Foreign Trade, foreign-trade "corporations" conducted the buying and selling, though industrial ministries and even republic authorities could be involved in the negotiations. Barter deals at the frontiers and tourist traffic provide trivial exceptions to the rule. The object of the monopoly was to fit imports and exports into the overall plan regardless of changes in world prices and availabilities. Foreign trade corporations are not responsible for profits or losses caused by the difference between the prices they negotiate and the corresponding ruble price, given the arbitrary exchange rate. Exports must be planned to cover the cost of necessary imports—notably petroleum, timber, and natural gas during the last decades in exchange for materials, equipment, and foodstuffs during poor harvest years. Hence enterprise managers were told what to produce for export and what may be available from foreign sources. Thus, they had little or no knowledge of foreign conditions, nor interest in adjusting their activities to suit the international situation of the USSR. With internal prices unrelated to international scarcities, the planning agencies could not allow ministries or chief administration, still less enterprises, to decide on their own what to buy or sell abroad. Tariffs were strictly for revenue purposes. For instance, when the world market price of oil quadrupled in 1973–1974, the internal Soviet price did not change for nearly a decade. But trade with the outside world is conducted in convertible currencies, their volumes then translated into valyuta rubles at an arbitrary, overvalued rate for the statistics. Prices charged to or by COMECON partners were determined in many different ways, all subject to negotiation and dispute. Some effort was made during the 1970s to calculate a more efficient pattern of foreign trade for investment purposes, but in practice these calculations were little applied.

Given the shortage of foreign currency and underdeveloped trading facilities, Soviet trade corporations often engaged in "counterpart-trade," a kind of barter, where would-be western sellers were asked to take Soviet goods in return for possible re-sale. For instance, the sale of large-diameter gas pipes for West European customers would be re-paid in gas over time. Obviously, these practices were awkward, and Soviet leaders tried a number of organizational measures to interest producers in increased exports, with little success.

One of the changes instituted under Mikhail Gorbachev's leadership was permission for Soviet enterprises to deal directly with foreign suppliers and customers. Given the short time perestroika had to work, it is impossible to tell whether these direct ties alone would have improved Soviet penetration of choosy markets in the developed world. After all, Soviet manufactures suffered from poor design, unreliability, and insufficient incentives, as well as substandard distribution and service.

During the years immediately after the dissolution of the Soviet Union, the Russian ruble became convertible for trade and tourist purposes, but exporters were required to rebate part of their earnings to the state for repayment of foreign debts. Further handicapping Russian exporters was the appreciating real rate of exchange, owing to continued inflation. The IMF also supported the over-valued ruble. By 1996 the ruble became fully convertible. All this made dollars cheap for Russians to accumulate and stimulated capital flight estimated at around $20 billion per year throughout the 1990s. It also made imports of food and luxuries unusually inexpensive, while making Russian exports uncompetitive. What is more, the former East European CMEA partner countries and most Commonwealth of Independent States (CIS) members now preferred to trade with the advanced western countries, rather than Russia. When in mid-1998 the government could no longer defend the overvalued ruble, it accepted a sixty percent depreciation to eliminate the large current account deficit in the balance of payments. This stimulated a recovery of Russian industry, particularly those firms producing import substitutes. Russian exports of oil and gas (which furnish about one-third of tax revenues) also recovered during the late 1990s. Rising energy prices likewise allowed the government to accumulate foreign exchange reserves, pay off much of its foreign debt, and finance still quite extensive central government operations. However, absent private investment, prospects for diversifying Russian exports beyond raw materials and arms were still unclear in the early twenty-first century.

See also: council for mutual economic assistance; economic growth, imperial; economic growth, soviet; foreign debt; trade routes; trade statutes of 1653 and 1667

bibliography

Erickson, P. G., and Miller, R. S. (1979). "Soviet Foreign Economic Behavior: A Balance of Payments Perspective." In Soviet Economy in a Time of Change: A Compendium of Papers, U.S. Congress, Joint Economic Committee, 3 vols. Washington, DC: U.S. Government Printing Office. 2:208-243.

Gregory, Paul R., and Stuart, Robert. (1999). Comparative Economic Systems, 6th ed. Boston: Houghton Mifflin.

Holzman, Franklyn D. (1974). Foreign Trade under Central Planning. Cambridge, MA: Harvard University Press.

Kaser, Michael. (1969). "A Volume Index of Soviet Foreign Trade." Soviet Studies 20(4):523–526.

Nove, Alec. (1986). The Soviet Economic System, 3d ed. Boston: Allen & Unwin.

Wiles, Peter. (1968). Communist International Economics. Oxford: Blackwell.

Martin C. Spechler