In the modern age of Globalization, trade restrictions can have a tremendous impact on the welfare of a nation. After the great discovery voyages of the 15th and 16th century and with the emergence of the modern industrial world, trade has become an increasingly important mechanism of wealth generation.
Adam Smith propounded the view that advantages in productivity should make commerce beneficial to all nations. His famous comparison between Portugal and England became a well quoted example of how trade can benefit all countries. Since England had an advantage in the production of textiles, and Portugal had an advantage in the production of wine, Smith claimed that both nations would profit if they formulated trade patterns where England imported all its wine from Portugal, who in turn would sell its textiles to England. Smith made the point that both Portugal and England would be far richer if they started trading. This argument has become the foundation of liberalism.
David Ricardo advanced Smith’s argument by propounding the view that comparative advantages were at the root of the trade advantages. Ricardo believed that nations should trade so they would always have comparative advantages over other nations, defined as advantage in terms of opportunity costs.
Nowadays, economic theories have been greatly refined, but no one disputes the notion that trade is beneficial to all nations, and the notions of Smith and Ricardo are widely regarded as axioms of economics.
As trade has become more important to the wellbeing of nations, trade restrictions become more pernicious in international commerce. Trade restrictions can have a very negative impact on the wealth of nations for they obstruct trade-related gains that would otherwise occur if trade were freer.
Concerns related to the negative impacts of trade have led to the creation of the World Trade Organization (WTO), following the Uruguay Round of the GATT and the Marrakech agreement. Unlike the GATT, the WTO has a much more ambitious Dispute Settling Mechanism (DSU), which aims to prevent trade barriers from distorting patterns of trade. In order to foster trade and reduce the impact of trade restrictions, several important trade agreements were established in the 1990s, such as the North American Free Trade Area – NAFTA, the MERCOSUL bloc, the Association of South East Asian Nation – ASEAN, the Asia-Pacific Economic Cooperation – APEC.
At present, the Doha round of trade negotiations is under way with a very ambitious mandate (the Doha mandate) to liberalize trade in agriculture and attain further gains in services and intellectual property.
Recent food-related inflationary pressures illustrate how trade restrictions and distortions can have a negative impact on the wellbeing of nations and affect their economic welfare. In fact, most trade restrictions today are placed on agricultural goods. The Uruguay round was quite successful in reducing trade restrictions placed on manufactures. In terms of trade in agriculture, however, progress was rather disappointing.
Trade restrictions in agriculture represent a large share of the problem of the current inflationary wave that is costing the economic welfare for developed and developing nations alike. Trade restrictions persist in services and telecommunications and in the form of trade distorting subsidies, nontariff barriers and dumping. Specialists agree that trade distorting mechanisms are detrimental to all.
The ongoing financial turmoil indicates the strong need for the Doha round to be successfully completed. In times of such acute financial crisis as the one the world is going through today, throwing away commerce related gains would be sheer madness. The recent gathering of the G-20 nations in the USA reveals that world leaders are well aware of this simple truth.