Given the dislocations and controversies, some people question the importance of efforts to liberalize trade and wonder whether the economic benefits are outweighed by other unquantifiable negative factors. It is important to remember, however, that the original impetus for the process of trade liberalization was undertaken for reasons that went far beyond economic concerns.

The Origin of Recent Trade Liberalization Efforts

Following World War II, the leaders of the world’s largest industrial economies set about to create institutions such as the General Agreement on Tariffs and TradeAt the Bretton Woods conference following World War II, representatives of the United States, Great Britain, France, Russia, and 40 other countries created GATTAt the Bretton Woods conference following World War II, representatives of the United States, Great Britain, France, Russia, and 40 other countries created GATT to reduce barriers to international trade. It was an agreement not an organization. The functions of GATT were taken over by the World Trade Organizationan international body dealing with the rules of trade between participating nations when it was established in 1990. to reduce barriers to international trade. It was an agreement not an organization. The functions of GATTAt the Bretton Woods conference following World War II, representatives of the United States, Great Britain, France, Russia, and 40 other countries created GATT to reduce barriers to international trade. It was an agreement not an organization. The functions of GATT were taken over by the World Trade Organizationan international body dealing with the rules of trade between participating nations when it was established in 1990. were taken over by the World Trade Organizationan international body dealing with the rules of trade between participating nations when it was established in 1990. (GATTAt the Bretton Woods conference following World War II, representatives of the United States, Great Britain, France, Russia, and 40 other countries created GATT to reduce barriers to international trade. It was an agreement not an organization. The functions of GATT were taken over by the World Trade Organizationan international body dealing with the rules of trade between participating nations when it was established in 1990.), to promote trade liberalization, and the World Bank and the International Monetary Fund, to better coordinate global economic policy. The world leaders who established these organizations did so out of what they believed to be a bitterly learned lesson about the costs of not coordinating economic policy and of not safeguarding free trade.

This generation had just emerged from the greatest conflict the world had ever seen, whose origins could be traced to the fascist dictatorships that sprang up as a result of the worldwide Great Depression.

In the late 1920s economies around the world stumbled and fell, causing widespread unemployment and slashing economic production. The U.S. government, like many others, saw its revenues falling and domestic production increasingly endangered by now-cheap foreign imports. In response, the U.S. Congress passed the Smoot-Hawley TariffTarrifs are a list of taxes or customs duties payable on imports or exports. Act, which raised tariffs on imports by nearly 60 percent. This was done as a means of both raising revenue and curbing imports. In response, 60 other countries retaliated against the United States, raising their own tariffTarrifs are a list of taxes or customs duties payable on imports or exports. barriers. Nations also began to devalue the exchange rate of their currencies, to make their exports cheaper to their trade partners.

These mutual increases in tariffs and competitive devaluations are often referred to as “beggar-thy-neighbor” policies. As we have described earlier in this brief, the gains from trade are, on balance, beneficial to both parties. Unlike most economic policies that seek to promote mutual gains, however, muntal increases in tariffs and competitive devaluations tend to only make matters worse for all concerned.

As a result of these devaluations and newly erected tariffTarrifs are a list of taxes or customs duties payable on imports or exports. barriers, the volume of world trade dropped dramatically, and served to deepen and lengthen the Great Depression.

President Franklin D. Roosevelt’s Undersecretary of State Sumner Welles later concluded, ”The high tariffTarrifs are a list of taxes or customs duties payable on imports or exports. [of Smoot-Hawley] rolled up unemployment in Great Britain and in Western Europe…. [It] encouraged the German government to adopt its autarchic economic policy, which in turn was a contributing factor in bringing about the second World War.”

Indeed, the disaster created by Smoot-Hawley was so quickly and clearly evident that it led to a strong reversal by way of the Reciprocal Trade Agreement Act of 1934. For the first time, Congress gave the president the authority—albeit for three years only then subject to renewal—to negotiate tariffTarrifs are a list of taxes or customs duties payable on imports or exports. cuts on a bilateral, reciprocal basis with other countries. These cuts could be implemented by Executive Order, i.e., without the need for Congress’s permission. This authority was renewed repeatedly in the ensuing years and by 1945, 25 reciprocal agreements had been negotiated. Most importantly, this meant that the ability to implement protective trade policy was now constrained by international agreements committing the United States to lower trade tariffs.

After World War II, global leaders sought to put permanent agreements and institutions in place to ensure that economic chain reactions, like the one triggered by Smoot-Hawley, never took place again. One of their goals was the creation of the International Trade Organization (ITO), with a very ambitious agenda that not only covered trade but also extended to include rules on employment, commodity agreements, restrictive, business practices, international investment, and services.

The proposed agreement turned out to be more than the U.S. Congress was prepared to swallow, so the ITO became stillborn. Instead, the leading nations, including the United States, settled upon the GATTAt the Bretton Woods conference following World War II, representatives of the United States, Great Britain, France, Russia, and 40 other countries created GATT to reduce barriers to international trade. It was an agreement not an organization. The functions of GATT were taken over by the World Trade Organizationan international body dealing with the rules of trade between participating nations when it was established in 1990., which was not a permanent organization and had a narrower focus limited to the reduction of industrial tariffs (the United States insisted on the exclusion of agricultural goods).

At almost any given time, no matter how prosperous the world economy may be overall, there are usually a few countries undergoing some kind of economic shock. Every time a country suffers an economic downturn, it is very tempting for political leaders to try to “export” their problems onto their trading partners by raising tariffs or devaluing their currencies.

Many economists make the analogy that the pursuit of free trade is a bit like riding a bicycle: If you don’t continue to make forward progress, you are in danger of falling off. Governments around the world are under almost constant pressure to protect domestic industries—either because of an economic downturn, changes in technology, or any of the myriad forces behind the “creative destruction” of the free market.

Trade agreements that are vigorously enforced are the most powerful ways to prevent governments from succumbing to these pressures. Although many valid criticisms can be levied against the current world trading system, it is the view of the author that critics should remember the precedent that led to its creation, and the global turmoil that was caused by the absence of international rules.

Questions for Discussion:

1. Why do you think the U.S. Congress opposed the International Trade Organization?
2. Do you think the international regulation of trade benefits countries overall? Does it help particular countries more than others?
3. How do governments balance the need to respond to domestic demands for protection of particular sectors (agriculture, manufacturing, etc.) and international demands for open markets?

Next: The Liberalization of International Trade