Memorandum by the Chief of the Division of Commercial Treaties and Agreements (Hawkins) to the Assistant Secretary of State (Acheson)

Mr. Acheson: Mr. Keynes’ views on the most-favored-nation clause are not very clear from this letter.25 It is apparent, however, that he [Page 20] doesn’t like it. Taking some of his oral remarks in conjunction with this letter, the main terms of his indictment can be made out. I set them down with my comments:

On one occasion recently Mr. Keynes stated that obviously the most-favored-nation principle did not in fact result in nondiscriminatory treatment since it often happens that a country, despite its most-favored-nation obligations, will apply a generally higher level of duties to the characteristic products of a particular foreign country than those applicable to the characteristic products of another country; hence it discriminates against the former without calling it discrimination. For example, France used to claim that we discriminated against her because our level of duties on her typical products (luxury products) were higher than those on the typical products of other countries.

The answer is, of course, that the most-favored-nation clause does not pretend to insure that a country’s policy will be wholly nondiscriminatory or even equitable. It has a much more modest and attainable objective which is simply that any given product of a particular foreign country will not be placed at a competitive disadvantage as compared with the like product of any third country. It aims to prevent artificial diversion of trade as between foreign supplying countries; to insure that the efficient producer in one foreign country will not, because of discriminatory practices in the importing country, lose his market to less efficient producers in other countries.

Mr. Keynes’ argument regarding discriminatory general tariff levels is not an argument against the most-favored-nation clause because that clause does not even profess to cover such generalities. Our tariff rates on silk fabrics may, for example, impose a greater burden on this typically French product than do our rates on Argentine canned beef. The most-favored-nation clause does not even seek to cover such a situation since no diversion of business away from French producers and into the hands of less efficient foreign suppliers is involved.

This leads to another contention of Mr. Keynes which is set forth in his letter to you of July 29, namely, that the most-favored-nation principle is a shelter for reactionaries. There is an element of truth in this. The policy of the United States during the twenties illustrates the point Mr. Keynes has in mind. During that period we insisted on the right to impose any tariff we saw fit for the protection of domestic producers and at the same time insisted on receiving as favorable treatment in each foreign country as that granted to our competitors in third countries. In short, if we could have made this stick, we could have maintained any tariff we chose without danger of paying a stiff price for it by having our export trade diverted into the hands of our competitors. In those days we did in fact what Mr. Keynes suggests; [Page 21] attempted to take shelter behind the most-favored-nation clause in order to impose exorbitant tariffs without suffering the consequences.

It is to be admitted that the most-favored-nation principle alone, without a moderate level of nondiscriminatory rates, is not sufficient of itself to promote a healthy international trade. The United States has since recognized this fact in the enactment of the Trade Agreements Act.26 In the post-war period we should seek to get the widest possible acceptance of both of these principles.

Mr. Keynes argues in this letter to you that the most-favored-nation clause “made a hash of the old world”, (presumably meaning the prewar world). This is a most unwarranted statement. It would be much more accurate to say that the British, and other countries, made a hash of the most-favored-nation clause by negotiating bilateral arrangements and other agreements which resulted in widespread discriminations.

On the whole, the tenor of Mr. Keynes’ argument seems to be that we are attaching too much importance to nondiscriminatory treatment of our trade; that discrimination is not after all a matter of such significance as to justify our interfering with the bilateralistic plans which Mr. Keynes has in view. If definite proof were needed that nondiscriminatory treatment is important, and important to the British themselves, it could easily be had by suggesting that this obsolete instrument, the most-favored-nation clause, be omitted from the revised trade agreement now under discussion. This would allow us to impose higher duties on British goods than apply to like products from competing sources, and would be our counterpart of the freedom which the British wish to reserve for themselves to discriminate in the application of their exchange control. It would be a perfectly safe experiment, as they would never agree to it.

It seems to me that what Mr. Keynes has completely failed to see and understand is that the idea of nondiscrimination (in the properly limited sense as used above) is not a philosophical concept but rather a matter involving considerations of practical politics and economics. The imposition of high, though nondiscriminatory, trade barriers for the protection by a country of its own producers does and has aroused resentment, but this resentment is mitigated by the fact that a certain degree of preference by a government for its nationals is understandable and tolerable. But discrimination in favor of other foreigners is not so regarded. And above all, he fails wholly to see that after the sacrifices the American people are being called upon to make to help Great Britain in the present emergency (even though we are thereby helping ourselves), our public opinion simply would not tolerate discrimination against our products in Great Britain [Page 22] and, at Great Britain’s instance, in other countries. Mr. Keynes’ failure to grasp this humble fact probably explains his failure to understand the impossibility of collaboration between the United States and the United Kingdom in the atmosphere which his kind of policy would create and hence the serious consequences to both countries and to the world which could result from that policy.

  1. Letter to Assistant Secretary of State Acheson, July 29, p. 16.
  2. Approved June 12, 1934; 48 Stat. 943.