Ever since Adam Smith extolled the virtues of the division of labor and David Ricardo explained the comparative advantage of trading with other nations, the modern world has become increasingly more economically integrated. International trade has expanded, and trade agreements have increased in complexity. While the trend over the last few hundred years has been toward greater openness and liberalized trade, the path has not always been straight. Since the inauguration of the General Agreement on Tariffs and Trade (GATT), there has been a dual trend of increasing multilateral trade agreements, those between three or more nations, as well as more local, regional trade arrangements.
From Mercantilism to Multilateral Trade Liberalization
The doctrine of mercantilism dominated the trade policies of the major European powers for most of the sixteenth century through to the end of the 18th century. The key objective of trade, according to the mercantilists, was to obtain a “favorable” balance of trade, by which the value of one’s exports should exceed the value of one’s imports.
The mercantilist trade policy discouraged trade agreements between nations. That's because governments assisted local industry through the use of tariffs and quotas on imports, as well as the prohibition of exporting tools, capital equipment, skilled labor or anything that might help foreign nations compete with the domestic production of manufactured goods.
One of the best examples of a mercantilist trade policy during this time was the British Navigation Act of 1651. Foreign ships were prohibited from taking part in coastal trade in England, and all imports from continental Europe were required to be carried by either British ships or ships that were registered in the country where the goods were produced.
The whole doctrine of mercantilism would come under attack through the writings of both Adam Smith and David Ricardo, both of whom stressed the desirability of imports and stated that exports were just the necessary cost of acquiring them. Their theories gained increasing influence and helped to ignite a trend towards more liberalized trade — a trend that would be led by Great Britain.
In 1823, the Reciprocity of Duties Act was passed, which greatly aided the British carry trade and made permissible the reciprocal removal of import duties under bilateral trade agreements with other nations. In 1846, the Corn Laws, which had levied restrictions on grain imports, were repealed, and by 1850, most protectionist policies on British imports had been dropped. Further, the Cobden-Chevalier Treaty between Britain and France enacted significant reciprocal tariff reductions. It also included a most favored nation clause (MFN), a non-discriminatory policy that requires countries to treat all other countries the same when it comes to trade. This treaty helped spark a number of MFN treaties throughout the rest of Europe, initiating the growth of multilateral trade liberalization, or free trade.
The Deterioration of Multilateral Trade
The trend toward more liberalized multilateral trading would soon begin to slow by the late 19th century with the world economy falling into a severe depression in 1873. Lasting until 1877, the depression served to increase pressure for greater domestic protection and dampen any previous momentum to access foreign markets.
Italy would institute a moderate set of tariffs in 1878 with more severe tariffs to follow in 1887. In 1879, Germany would revert to more protectionist policies with its "iron and rye" tariff, and France would follow with its Méline tariff of 1892. Only Great Britain, out of all the major Western European powers, maintained its adherence to free-trade policies.
As for the U.S., the country never took part in the trade liberalization that had been sweeping across Europe during the first half of the 19th century. But during the latter half of the century, protectionism significantly increased with the raising of duties during the Civil War and then the ultra-protectionist McKinley Tariff Act of 1890.
All of these protectionist measures, however, were mild compared to the earlier mercantilist period and in spite of the anti-free trade environment, including a number of isolated trade wars, international trade flows continued to grow. But if international trade continued to expand despite numerous hurdles, World War I would prove to be fatal for the trade liberalization that had begun in the early 19th century.
The rise of nationalist ideologies and dismal economic conditions following the war served to disrupt world trade and dismantle the trading networks that had characterized the previous century. The new wave of protectionist trade barriers moved the newly formed League of Nations to organize the First World Economic Conference in 1927 in order to outline a multilateral trade agreement. Yet, the agreement would have little effect as the onset of the Great Depression initiated a new wave of protectionism. The economic insecurity and extreme nationalism of the period created the conditions for the outbreak of World War II.
With the U.S. and Britain emerging from World War II as the two great economic superpowers, the two countries felt the need to engineer a plan for a more cooperative and open international system. The International Monetary Fund (IMF), World Bank, and International Trade Organization (ITO) arose out of the 1944 Bretton Woods Agreement. While the IMF and World Bank would play pivotal roles in the new international framework, the ITO failed to materialize, and its plan to oversee the development of a non-preferential multilateral trading order would be taken up by the GATT, established in 1947.
While the GATT was designed to encourage the reduction of tariffs among member nations, and thereby provide a foundation for the expansion of multilateral trade, the period that followed saw increasing waves of more regional trade agreements. In less than five years after the GATT was established, Europe would begin a program of regional economic integration through the creation of the European Coal and Steel Community in 1951, which would eventually evolve into what we know today as the European Union (EU).
Serving to spark numerous other regional trade agreements in Africa, the Caribbean, Central and South America, Europe’s regionalism also helped push the GATT agenda forward as other countries looked for further tariff reductions to compete with the preferential trade that European partnership engendered. Thus, regionalism did not necessarily grow at the expense of multilateralism, but in conjunction with it. The push for regionalism was likely due to a growing need for countries to go beyond the GATT provisions, and at a much quicker pace.
Following the breakup of the Soviet Union, the EU pushed to form trade agreements with some Central and Eastern European nations, and in the mid-1990s, it established some bilateral trade agreements with Middle Eastern countries. The U.S. also pursued its own trade negotiations, forming an agreement with Israel in 1985, as well as the trilateral North American Free Trade Agreement (NAFTA) with Mexico and Canada in the early 1990s. Many other significant regional agreements also took off in South America, Africa and Asia.
In 1995, the World Trade Organization (WTO) succeeded the GATT as the global supervisor of world trade liberalization, following the Uruguay Round of trade negotiations. Whereas the focus of GATT had been primarily reserved for goods, the WTO went much further by including policies on services, intellectual property and investment. The WTO had over 145 members by the early 21st century, with China joining in 2001. (
While the WTO seeks to extend the multilateral trade initiatives of the GATT, recent trade negotiations appear to be ushering in a stage of “multilateralizing regionalism.” The Transatlantic Trade and Investment Partnership (TTIP), the Transpacific Partnership (TPP), and the Regional Cooperation in Asia and the Pacific (RCEP) comprise a significant portion of global GDP and world trade, suggesting that regionalism may be evolving into a broader, more multilateral framework.
The Bottom Line
The history of international trade may look like a struggle between protectionism and free trade, but the modern context is currently allowing both types of policies to grow in tandem. Indeed, the choice between free trade and protectionism may be a false choice. Advanced nations are realizing that economic growth and stability depend on a strategic mix of trade policies.