1971: A Year of Change

How US hegemony transformed international trade for the worse

1971 was the year the US ran a trade deficit for the first time since the 1930s. The reaction of Congress, and in turn US foreign policy, had an extensive impact on our international political economy both then and to this day.

As economist Michael Mastanduno writes, “The postwar United States had enjoyed the best of both worlds. It had low tariffs and open domestic markets, allowing it to serve credibly as the leader of a liberalizing global economy without having its domestic producers face stiff competition from abroad”[1]. Trade liberalisation began to thrive after World War II, with the formation of the General Agreement on Tariffs and Trade (GATT), the International Monetary Fund (IMF) and the World Bank in 1944. The US promoted a free market agenda for decades; advocating trade liberalisation to reluctant partners across the world to create a global export market for US consumer goods. However, from 1971 it faced competition from developing economies, particularly in Asia, that were seeing unprecedented levels of export-led growth.

The ideological U-turn in US foreign economic? policy in response is simply astonishing. Under the Nixon, Ford, Carter and Reagan administrations, America’s trading partners were forced to accept export restraints, trade arrangements and American subsidies on exported goods. Section 301 of the Trade Act of 1971 granted the United States the unprecedented authority to act as “self-appointed prosecutor, jury, and judge in adjudicating trade practices” [2], violating not simply the spirit but also the letter of the GATT.

America has been described as a ‘system maker and privilege taker’ [3]. It is certainly arguable that developing countries have reaped great benefits from open markets over the last thirty years, in particular the BRICs, East Asian Tigers and several African economies too. However, a holistic worldview displays a grand network of global imbalances as the US executes extraordinary influence over international institutions using both formal and informal mechanisms [4]. These organizations are run by the global elite and for the global elite.

American neoprotectionism is rife, enforcing free trade policies worldwide, meanwhile disregarding such principles at home. Agricultural subsidies are a key example of American neoprotectionism. The World Trade Organisation has turned a blind eye to American cotton subsidies for the last eleven years. In 2011, America subsidized its cotton industry by $24bn [5] to out-price competitors in Brazil, Pakistan, Ivory Coast and Ghana. An Oxfam study found that a complete removal of American subsidies would increase world price of cotton from between 6-14% [6]. Even in 2012, The Economist warned of new restrictions, ranging “from higher tariffs to costly import licences and customs controls” being imposed by the G-20 countries in the wake of the financial crisis [7].

The US protectionist backlash to foreign competition was tolerated because of the 20th century developing world’s economic and security dependence on America. Through the influence of the IMF, the US exacerbated this dependence by enforcing privatisation of industries in developing economies. For example, Bolivia discovered vast quantities of natural resources in the late 20th century. The IMF ‘encouraged’ Bolivia to privatize its pipelines, resulting in great investment from Western multinational corporations, which is estimated took 80% of their profits out of the country. This systematic exploitation of authority and structural inequality is not even the end of the story. The 2007 financial crisis represented the pinnacle of quite how this power disparity would play out to truly damage the hopes of developing economies during the global downturn.

As economist Joseph Stiglitz explains, the US had a moral culpability, “they had foisted on unwary developing countries liberalisation policies without appropriate safeguards.” [8] The hypocrisy and corruption of trade liberalisation had served the developing economies so poorly, yet foreign banks so well. While developed economies were able to introduce strong stimulus packages to redress falls in aggregate demand and provide financial support for their domestic industries; developing economies were left helpless. Poorer countries’ borrowing rates are higher, thus they have been unable to respond to economic decline with the same bailouts, guarantees, and expansionary fiscal policies, put in place by their self-interested developed counterparts.

As is clear, 1971 represented a turning point in global relations. Economic policy pursued by the US signified the beginning, of what led to years of two-faced international rhetoric from the developed world, in combination with a series of contradictory Western protectionist reforms. The repercussions of this extraordinary use of political leverage and international hegemony have led to a developing world struggling through a crisis which has not been of their making.


[1] Michael Mastanduno, System Maker and Privilege Taker: U.S. Power and the International Political Economy, ‘World Politics’, (Volume 61, Issue Number 1) p. 137

[2] Ibid. p. 138

[3] Ibid.

[4] http://www.oxfordscholarship.com/view/10.1093/0199261431.001.0001/acprof-9780199261437

[5] http://www.theguardian.com/global-development/poverty-matters/2011/may/24/american-cotton-subsidies-illegal-obama-must-act

[6] http://www.oxfam.org/en/node/173

[7] http://www.economist.com/node/21557766

[8] Joseph E. Stiglitz, The Stiglitz Report, (New York: The New Press; 2010)

Image from http://www.public-domain-image.com/free-images/miscellaneous/reconstruction-begins-on-the-road-that-stretches-through-aceh-province-from-banda-aceh