Papers Relating to the Foreign Relations of the United States, 1923, Volume I

611.0031/162

The Acting Chairman of the Tariff Commission (Culbertson) to the Secretary of State⁸⁴

Washington, December 14, 1922.

My Dear Mr. Secretary: In view of our present consideration of the drafts of several proposed commercial treaties, I venture to bring to your attention some problems presented by the most-favored-nation principle, now universally recognized as the basis of the commercial treaty structure of nations. Our policy, as you know, differs widely from that of almost all other leading commercial nations and the new economic situation in which we find ourselves raises serious doubt as to the wisdom of continuing a policy which, however well adapted to its original purpose, is now an obstacle to the consistent and effective development of our commercial policy.

Our traditional most-favored-nation policy dates from 1778. It is based upon the idea that treaty bargaining concerns primarily only the contracting states and that a reduction, made upon the “condition” that certain reductions be made by the other party, is not to be granted to any third power unless that power gives an “equivalent” concession. This “conditional” interpretation of the most-favored-nation principle extends to country B the concessions we granted to country A for a consideration only if country B makes concessions to us equivalent to those made by country A. At first glance this principle seems eminently fair. It has the appearance of equality and was adopted with the idea that it offered, if not equality of treatment, at least the opportunity to secure equality of treatment on a reasonable basis. It was inaugurated at a time when tariff rates were of minor importance as compared to the right to trade at all and to the right of equal treatment for national vessels. Trading and navigation rights in those days were bargained for as entities without too narrow an examination of the question whether the rights exchanged were not perhaps somewhat more valuable to the one than to the other country. But the old navigation laws are now a thing of the past, and international commercial policies are dominated by tariff rates and regulations. Most of the European powers have two column tariffs and except in a few cases tariff negotiations have developed into statistical controversies over the relative value of the concessions to be made. This has rendered it almost impossible to arrive at any agreement upon the equivalent concessions to be made by the third party. In practice, therefore, the conditional interpretation of the most-favored-nation clause has broken down. In some cases the United States has taken the extreme position of asserting that the third country could offer no equivalent concession because the value of the original concession consisted in its being exclusive. Our most-favored-nation policy, therefore, which may once have been justifiable and effective, has become sterile, or insofar as it is effective its results are quite different from those originally sought. Instead of contributing to equality of commercial opportunity among nations, it has become the support of discriminatory reciprocity treaties,—a policy again rejected by Congress within the last few months.

We have, it is true, received most-favored-nation treatment in most of the countries which have double column tariffs. We owe this almost exclusively, however, to other causes than to our conditional most-favored-nation policy. We owe it to our political importance, to certain old treaties of long standing, and to the interpretation of these treaties by other powers as granting to us unconditionally concessions to which most-favored-nations were entitled, to the predominance, until very recently, of unmanufactured articles in our export trade, and finally to our actual policy of establishing a single tariff schedule applicable impartially to all countries. So far as we have benefited by most-favored-nation treatment in foreign countries, therefore, the benefit has not been due to the conditional most-favored-nation pledges in our commercial treaties. On the contrary it has resulted from the quiescence of such a principle in our tariff policy and from the fact that other nations have not applied the logic of our position to our trade.

The conditional most-favored-nation principle affords us no security against discriminations in foreign countries and in this period of reconstruction, when many countries are revising their treaties and reconsidering their grants of most-favored-nation treatment, the conditional most-favored-nation principle is liable to be applied against us, as it has been on one or two occasions in the past. Moreover, since 1914 our interests in the commercial policies of other nations has increased. Our export trade has grown in volume and variety. We have become more and more dependent on foreign sources of raw material. The volume of our foreign investment has expanded. Our selfish national interest, therefore, indicates this as the time when we should adopt an active policy to safeguard our interests in markets and in sources of raw material in foreign countries. This active policy, as contrasted with our passive and negative attitude in the past, should consist of a frank abandonment of the conditional most-favored-nation policy and the adoption of a program of revising and completing our commercial treaties on the basis of the unconditional most-favored-nation principle, that is, the principle of embodying in commercial treaties reciprocal pledges that concessions made by either party to a third power should be immediately and automatically extended to the other party to the treaty.

This policy is clearly in line with recent legislation. Section 317 of the Tariff Act of 1922⁸⁵ empowers the President to make effective the principle of equality of treatment in our foreign trade relations. In the words of the conferees, who gave final shape to this act:

The United States offers, under its tariff, equality of treatment to all nations, and at the same time insists that foreign nations grant to our external commerce equality of treatment.

Manifestly, this equality-of-treatment policy is entirely in line with America’s well-known attitude toward the “open door” in certain far-eastern countries and in mandated areas, a policy which has been generally recognized as a distinct contribution to commercial stability and to peace. Indeed, the principle underlying these policies is one and the same, for the term “open door,” as used in international politics, means simply equality of treatment in trade for all trading nations, as opposed to any policy which allows discriminations in favor of one or more nations.

The more carefully one examines the principle of the open door, the clearer it becomes that the problem is one which relates not merely to a few countries whose treaties bind them to collect no import duties in excess of 3, 5, 10 or 11 per cent ad valorem, not merely to economically backward countries and undeveloped colonies, but also to the markets of the great industrial powers themselves. No really satisfactory state of international relationships, no assured peace, can be established until all countries feel secure in a guarantee of equality of treatment in all the markets of importance throughout the world. Many of the European nations before 1914 had already made considerable progress toward this goal and this progress was made by the usual unconditional most-favored-nation clause in commercial treaties.

Now that Congress has taken a definite stand for the policy of equality of treatment, it would seem to follow logically that in the revision of our commercial treaties we should adopt the unconditional form of the most-favored-nation clause. Thereby we should establish a treaty basis on which to insist upon equality of treatment for our citizens and products in foreign markets. The unconditional form of the most-favored-nation clause is the simplest application to commercial intercourse between nations of the equality-of-treatment principle and tends powerfully to prevent discriminations against third countries and all the ill-feeling, distrust, retaliation, and international friction incident thereto.

Whatever the merits of our conditional most-favored-nation practice may have been in days gone-by, it is of no value now under the present economic conditions of the world and under the tariff policy adopted by Congress. On the contrary, it has serious disadvantages among which may be mentioned the following:

1. The conditional most-favored-nation clause in order to be effective implies an active policy of tariff bargaining. Insofar as the conditional principle is logically followed out, we become entitled to the concessions which other powers grant to each other only after we negotiate and make concessions in return. Congress, however, has, as I have said, only recently rejected a policy providing “for special negotiations whereby exclusive concessions may be given in the American tariff in return for special concessions from foreign countries.” Congress does not favor agreements which involve reductions in protective rates on one or both sides and which, when brought before the Senate for ratification, result in long debate in which it is necessary to reopen all the issues involved in tariff legislation. The unavoidable delay of final action incident to this procedure on both sides is likely to render this method of tariff negotiations wholly ineffective. Tariff bargaining with other nations for concessions is at best complicated and dilatory and seldom, if ever, produces results which are commensurate with the irritation which it engenders among excluded nations.

2. An effective pursuit of the conditional most-favored-nation policy is practically certain to result in a series of rates of duty upon the same article differing with the country of origin. Such a complication of tariff rates, however, is expensive to administer and lends itself more easily to fraud. Moreover, it means discriminations against certain countries in favor of others and the present certainly is no time to increase the prejudice of foreigners against the United States.

3. Under our new tariff the President is authorized to impose additional duties on the whole or on any part of the commerce of any country which discriminates in any manner against American commerce. Consistency, therefore, requires that we do not ourselves initiate discriminatory rates. But so long as the conditional most-favored-nation principle dominates our commercial negotiations we can not pursue an active policy without introducing discrimination into our tariff schedules.

By way of contrast the general effect upon international commercial relations of the unconditional form of the most-favored-nation principle is indeed quite different. For example, under the unconditional form when country X has pledged most-favored-nation treatment in its treaties with other countries (as in fact all the other leading commercial nations have done), a new concession made at any time or in a later treaty by country X to any country is automatically and immediately extended to all the nations having most-favored-nation treaties with country X. The result is that every such country is assured that so long as its treaty stipulations are honestly carried out its commerce with treaty countries will never be placed at a disadvantage. Thus, when all countries follow the unconditional most-favored-nation practice, equality of treatment is guaranteed generally and tendencies are set in motion contributing to commercial stability, simplicity and uniformity of tariff rates, mutual confidence and international good will.

Contrasting unfavorably with this result are the results which follow upon the adoption of the conditional most-favored-nation practice. Under the latter any new concession made by country X to some other country in exchange for a real or alleged equivalent concession may not be claimed by the other nations to which country X has pledged most-favored-nation treatment unless they give what country X may deem an equivalent. The result under this practice is that no nation on earth can ever be certain that its commerce with any third nation will not be placed at a disadvantage as compared with competing countries. The tendency is toward inequality of treatment, complexity of tariff rates, commercial insecurity, perpetual suspicion and mutual distrust with the consequent international ill-will and more or less a consistent attempt at retaliation by injured countries.

It may be fairly said that our conditional most-favored-nation practice has hindered more than it has helped the development of our foreign trade. Now since Congress has abandoned the policy of separate tariff bargaining and adopted instead equality of treatment of all nations as the guiding principle of our foreign policy in commercial relations, nothing is to be gained and possibly much is to be lost by continuing to apply to our commercial treaty relations the conditional form and interpretation of most-favored-nation treatment. Conditions during the next decade require that we should now incorporate in our commercial treaty structure the unconditional most-favored-nation principle and thereby establish a treaty basis upon which we may claim equality of treatment for our citizens and products in foreign markets and in addition, help to restore, so far as commercial relations are concerned, mutual trust and good-will.

Once the old principle is abandoned and the new adopted many details will naturally require consideration. Means should be adopted to make the new principle effective in removing not only open but also concealed discriminations. Exceptions, such as our treaty with Cuba, justified by geographical relationships may be provided for. Consideration will have to be given to the application in the new principle to differential export duties and colonial preferences. But the consideration of such details and the adoption of safeguards will be comparatively simple once we decide to introduce consistency into our commercial policy by adopting as a policy parallel to our open-door policy, the unconditional most-favored-nation principle.

Just a word by way of summary. Our present policy is quiescent and ineffective. Advantages have come to us because it has not been carried out. To carry it out would involve us in inconsistencies, create discriminations, and result in retaliation. Finally, taking a large view of the situation, the adoption of the unconditional most-favored-nation policy with certain safeguards can be made to support an open-door policy not only in the Far East but throughout the world.

Very respectfully,

W. S. Culbertson

84. In a letter of Dec. 15, 1925 (file no. 611.0031/162) to the Chief of the Division of Publications of the Department of State, Mr. Culbertson wrote with respect to his letter of Dec. 14, 1922, to the Secretary of State: “This letter was preceded by a number of interviews with Mr. Hughes in which we discussed at length the proposed change in policy. This letter of December 14 was written at Mr. Hughes’ request and for the purpose which appears in the subsequent correspondence.” The correspondence referred to is that printed on the following pages.
85. 42 Stat. 858.