1. International Trade System: from Bretton Woods to our days
The clash between liberalism and protectionism describes in an accurate manner the history of the international economic system in the 20th century. With the advances of the industrial revolution, trade became an increasingly important aspect of a nation`s welfare. The consolidation of economic theories during last century represented a victory for liberalism. At least in the field of theory, economists could make a very solid case for free trade and liberalism. The daily realities of politics, however, made the whole picture far less clear.
During the 1930s, a series of economic events brought about a serious depression in the world economy, the Great Depression. Scholars agree that protectionist trade policies played an instrumental role in these unfortunate developments. In fact, according to Spero & Hart “Protectionism and the disintegration of word trade in the 1930s created a common interest in an open trading order and the realization that states would have to cooperate to achieve and maintain that order” (Spero & Hart: 67). The need to promote economic welfare and foster growth led the international community to a concerted effort at establishing a system of governance in economic international relations during the pots-war period. Hart & Spero identify three phases in the development of this system of governance. The first stretches from 1945 to 1971 and is known as the Bretton Woods system; the second, which goes from 1971 to 1989, is called the Interdependence period; the third, from 1989 to the present days, is called Globalization.
According to Hart & Spero “the Bretton Woods system rested on three political foundations: the concentration of power in a small number of states, the existence of a cluster of important interests shared by those states, and the present of a dominant power willing and able to assume a leadership role” (Spero & Hart: 2). At Bretton woods the foundations of the modern monetary and economic post-war order were laid down by the victors in World War II, led by England and the U.S. The Bretton Woods agreements also created the most important institutions of the international economic order: the International Monetary Fund - IMF, the World Bank and the General Agreement on Trade and Tariffs - GATT, the precursor of the World Trade Organization - WTO.
Through the International Monetary Fund, a system of monetary stabilization and crisis prevention in the area of the balances of payments was envisaged. The World Bank should provide assistance in the reconstruction of Japan and Europe and in the development of developing nations. The General Agreement on Trade and Tariffs was meant to foster trade via the elimination of barriers to trade, and thus generate welfare. For Spero & Hart, “The Bretton Woods system enabled Europe and Japan to recover from the devastation of the war, established a stable monetary system, encouraged more open trade, finance, and investment, and in turn led to a period of rapid economic growth” (Spero & Hart: 4).
A central feature of the system was the gold standard, by which the American Federal Reserve accepted to exchange U.S. Dollars for gold at 35 U$$ an ounce. The Bretton woods system represented the hegemony of the U.S. in the international economic order and the dollar replaced the British pound as the world currency. According to Spero & Hart “the rules of Breton Woods, set forth in the articles of the agreement, provided for a system of fixed exchange rates” (ibid. 14).
In terms of trade, the Bretton Woods system most important accomplishment was the creation of the GATT. Spero and Hart assert that “the GATT reflected two components of the prevailing agreement on open trade: the economic consensus that open trade would allow countries to specialize according to the principle of comparative advantage and thereby achieve higher levels of growth and well-being, and the political consensus that a liberal trading regime would promote not only prosperity but also peace” (Spero & Hart: 69).
The GATT agreement intended to prohibit the use of quantitative restrictions to trade (quotas) and established the most-favored-nation principle, which stipulated that any trade advantage should be granted to all nations. The GATT also established the principle of multilateral trade negotiations (Rounds), which eventually became the principal method of trade management in the post war period (Spero & Hart: 70).
In the 1970s, the Bretton Woods system was replaced by another international economic system characterized by interdependence (Spero & Hart: 69). Due to the relative decline of the U.S. in terms of international trade and to its chronic trade deficits, by the end of the Bretton Woods system the United States had lost its preeminence in the international economic arena and started pursuing a policy of “benign neglect”, allowing the Dollar to float. Spero & Hart argue that “in this period, the EU emerged as the world`s largest trading bloc”, after successfully establishing a customs union, a common external tariff and a common agricultural policy (Spero & Hart: 78).
Furthermore, Spero & Hart maintain that “the reduction of barriers to trade and capital as well as the revolution in information technologies enabled an expansion in international economic interaction among the market economies: larger international capital flows, the growth of international trade, and the development of international systems of production” (Spero & Hart: 5).
These developments led to an ever growing interdependence between national economies, which became more sensitive to events at the international level. By the end of 1971, the convertibility of the Dollar, a central feature of the Bretton Woods system, was abolished by President Nixon. A system of fixed exchange rates (Bretton Woods) was therefore replaced by a system of floating rates (interdependence) and this shift characterized the new economic world order, which would be marked by severe financial and economic crises during the 1980s, acutely felt in developing nations. The 1980s eventually became known as the lost decade and the world experienced a phenomenon called stagflation, the perverse combination of inflation with stagnation. As a result, the world also experienced a surge in protectionist policies, particularly in developed countries, in the form of nontariff barriers and other impediments to trade.
2. The Uruguay Round and the WTO
Due to the challenges posed during the 1980s, including the resurgence of protectionist policies, the GATT launched in 1986, in Punta de Este, the Uruguay Round of trade negotiations. According to Spero & Hart “The Uruguay round negotiations, which began in 1987, marked a new effort by the developed countries to devise new rules and institutions for managing the new global trade system” (Spero & Hart: 97). The Uruguay Round was concluded with the signing of the Marrakesh Agreement, establishing the World Trade Organization - WTO to replace the old GATT and cutting tariffs by over one-third. A General Agreement on Trade in Services, an agreement on safeguards, the Multi-Fiber Arrangement and an agreement on Subsidies and Countervailing measures were also signed. For Spero and Hart, these agreements became the foundation for further globalization of world trade (Spero & Hart: 101).
As it happened within the GATT, no significant progress was obtained in agriculture during the Uruguay Round. Agricultural production remained heavily subsidized and trade in agricultural goods remained heavily distorted. Other differences persisted (services, telecommunications, intellectual property, antidumping and nontariff barriers) and, in order to address these problems, the ongoing Doha Round was established in 2001.
From the times of the arrangements of Bretton Woods to our days, international trade has expanded enormously and the world economy has become truly integrated. The management of these changes required a continuous process of institution building to cope with the new challenges. The Word Trade Organization embodies, with all its flaws and deficiencies, the best achievements in terms of trade liberalization and trade management. The difficulties in the ongoing Doha round illustrate how challenging the road ahead is. Progress in terms of promotion of free rules to trade and stability for the world trading system to function properly should not be underestimated, however. Despite all its difficulties, the gigantic expansion of trade after World War II generated immense welfare for humanity, albeit unevenly distributed. Today more than ever the findings of Adam Smith and David Ricardo hold true: commerce does indeed benefit all, even when it also creates winners and losers.
Spero, J. E. and Hart, J. A. (2003), the Politics of International Economic Relations (USA: Thomson - Wadsworth).