Faculty Perspective: How trade wars can mask the risk of real wars

March 14, 2018
Faculty Perspective: How trade wars can mask the risk of real wars

This piece was originally published in the Washington Post on March 14, 2018.

By Katherine Rye Jewell
Assistant Professor of History
Fitchburg State University

Portrait of Assistant Professor Katherine Jewell
In announcing new protective tariffs on foreign-made steel and aluminum, President Trump declared that trade wars are “easy to win.” But the case of the 1937 trade war with Japan over cheap cotton textiles suggests that while Trump’s trade protectionism might serve his short-term economic and political goals, the long-term effects could be catastrophic.

Both moments involve foreign countries aggressively targeting a domestic American industry, sparking a trade war. In 1937, the “easy” win of voluntary quotas, rather than tariffs, gave domestic producers a short reprieve. But restrictions on foreign trade, whether enacted through tariffs or voluntarily negotiated quotas, have limited advantages — and high costs. Even if a trade war could be easily won, the economic benefits might mask underlying diplomatic and military tensions without securing dependable, long-term stability for domestic industry — exactly as the 1937 textile trade war did.

In late 1936, as in recent years, representatives of a domestic industry raised concerns about a foreign power’s rapid investment in an expanding manufacturing sector that, aided by cheaper labor and exploitation, competed with American companies. Japanese cotton textiles had offered little competition to the dominant American industry until the mid-1930s, when exporters suddenly began dumping cheap products on the U.S. market.

Cotton representatives argued that the dumping represented more than just an economic problem. They saw it as a hostile act, equating it with Japanese military aggressions. As one manufacturer commented, “When Japan buys our cotton, whether she turns it into gun cotton and shoots shells at us or whether she ships it back as cloth, there would be casualties in either case.”

American textile manufacturers called for increased tariffs to protect domestic industry. Southern producers were particularly vocal because foreign goods, produced with cheap labor, threatened their main advantage domestically: low labor costs. But because Japan was a net purchaser of American goods — and because its cotton textiles represented only 1 percent of the domestic U.S. market — policymakers refused to intervene.

Alarmed by the sudden competition from goods produced by cheaper labor abroad —  particularly as Congress implemented a federal minimum wage and maximum hour rules and reciprocal trade policies — cotton textile manufacturers moved to impose order through personal policy negotiations outside legal and congressional action. They formed a visiting committee to travel to Japan and “acquaint” the Japanese Spinners’ Association, of which the overwhelming majority of Japanese manufacturers were members, with “the factual situation” in the United States.

This visiting committee, including the president of the American Cotton Manufacturers Association, the heads of Callaway Mills, Exeter Manufacturing and Sears (a major retailer of the textiles in question), negotiated a “gentlemen’s agreement” to limit Japanese imports. With its power, the Spinners’ Association could agree to concessions that would govern nearly Japan’s entire industry.

Manufacturers heralded the agreement as a “model” for future negotiations and for demonstrating the value of limited action by Congress or the president, and deference to the private sector, in economic matters. Conservative manufacturers preferred voluntary, private agreements among “reasonable” business executives, providing them with flexibility for export trade. One member of the commission declared that the agreement marked both the nations’ mutual “friendship” and manufacturers’ “wise economic statesmanship.”

The agreement seemed to signal mutual cooperation and peace, even as Japan continued to build its navy to rival U.S. power in the Pacific. At home, conservative manufacturers could use the pact as a sign of their stewardship of industry and labor arrangements — precluding, they contended, the need for federal legislation on wages and hours.

In the short term, U.S. manufacturers celebrated “security and stability,” and they congratulated themselves for avoiding the “expense and hazards of a political campaign looking for protection or legislation, or the exercise of executive powers.” Conservative manufacturers, wary of the shift of trade policy to the executive branch under President Franklin D. Roosevelt and Secretary of State Cordell Hull, were happy to work around the president.

Regarding rising tensions in the Pacific, U.S. manufacturers suggested that their gentlemen’s agreement offered a “remarkably effective” barrier compared with the boycotts organized in response to aggressive Japanese military expansion. By offering the Japanese some access to American markets, one U.S. representative argued, foreign manufacturers could modestly expand trade “freed from danger of tariff increases.”

Yet such promises of peace soon appeared hollow after expanded Japanese military aggression later that year. Boycotts and embargoes followed Japan’s invasion of French Indochina in 1940. The United States cut off oil, iron and steel, implementing a full embargo in July 1941 — five months before Pearl Harbor.

After World War II, Asian textile exports again threatened U.S. industry, displacing domestic products more significantly. Northern and Southern textile manufactures called for increased tariff protection in the early 1950s and launched a domestic boycott movement. But competitive advantage had shifted to Asia, U.S. textile manufacturing entered a long decline and key figures in the Republican Party joined Democrats in embracing free trade as part of the liberal postwar world order, defined by a preference for free trade.

In the decades that followed, the General Agreement on Tariffs and Trade (a multilateral trade treaty) and its successor, the World Trade Organization, reduced tariff barriers to provide freer exchange of goods as part of the liberal postwar world order. Such organizations, as well as other bilateral and multilateral arrangements, served both diplomatic and economic ends in a way that tariffs targeting single commodities or manufactured goods could not.

There is a lesson for the present moment. Short-term trade wins can benefit domestic industry, quelling domestic political concerns and offsetting opposition in other areas of economic policy. But by focusing on industry-specific goals or narrow political outcomes, the larger implications of such trade wars can remain clouded.

Trump’s actions suggest a return to trade policies driven by domestic political factors rather than global and diplomatic considerations. He benefits from executive power in setting trade policy, but he undermines the goals envisioned by the Roosevelt administration and the liberal internationalists who erected the institutions governing trade since World War II.

Steel and aluminum tariffs are not distracting from an unfolding world war, but they signal the potential unraveling of a system of international institutions and trade agreements put in place in the wake of that past conflagration and aimed at preventing such bloodshed.

In 1937, it was still possible to extract trade wins for specific industries through voluntary, nonstate-centered processes or by a small group of politicians or industry leaders. It still is — but these types of actions carry serious implications. They strike at the institutional and policy arrangements that have governed global trade since the end of World War II, which recognized that trade agreements brokered through international institutions prevented military conflict and needed to be supported.

Katherine Rye Jewell is assistant professor of history at Fitchburg State and author of "Dollars for Dixie." Follow @katisjewell on Twitter.

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