Economic theory suggests that free trade is likely to benefit countries. By allowing each country to specialise, production will take place in locations which enjoy a comparative advantage. World trade expanded m the 19th century but the first half of the twentieth century saw a fall in trade. This was partly caused by the economic disruption of two world wars. The Great Depression of the 1930s also led countries to adopt deeply protectionist policies.
Governments mistakenly believed that by keeping foreign goods out, they could save domestic jobs. In practice, all countries adopted the same mix of measures. World trade collapsed, jobs were lost in export industries and consumers were left having to pay higher prices to inefficient domestic producers when before they could buy goods from overseas at cheaper prices.
After the Second World War, there was a general recognition that these protectionist policies had been self-defeating. The Bretton Woods system of exchange rates banned competitive devaluations, whilst 23 countries in 1947 signed the General Agreement on Tariffs and Trade (GATT). Under GATT rules, member countries were not allowed to increase the degree of protection given to their domestic producers. Also, under the most favoured nation clause of the agreement, a country that offered a cut in tariffs to one country had to offer the same terms to all member countries.
GATT rules prevented protection increasing, but did nothing to reduce protectionism. For this reason GATT, and its successor organisation, the WTO (World Trade Organisation), have, over the years, organised a series of negotiations (called 'rounds') aimed at reducing tariffs and quotas. By the end of the last Tokyo round of negotiations in 1979, the average tariff on industrial goods had fallen to 4.7 per cent. Between 1986 and 1994 an eighth round of negotiations, the Uruguay Round, was successfully completed. It is clearly evident that since the launch of the GATT world trade has increased and much of this is due to the free trade that this organization has promoted, and the move away from protectionism.
These measures to promote free trade were a powerful influence in expanding trade in the post-war period. World merchandise export volumes (manufacturing, agricultural and mining products) rose three times as fast between 1950 and 1998 as world production itself.
The Uruguay Round, so called because the first meeting, took place in Uruguay in 1986, differed from previous rounds in that it did not concentrate mainly on trade in manufactured goods. The final treaty in fact covered three main areas, agriculture, textiles and services. The Uruguay deal made a start in dismantling protectionist barriers but, even so, they remain significant. An important part of the deal was that non-tariff barriers, such as quotas, have to be converted in to tariff barriers. This will make the cost of protectionism much more transparent.
Textiles have traditionally been highly protected too. This is because the major industrialised countries once had important textile industries of their own which have increasingly come under competitive pressure from Third World countries. The response by many First World countries was to allow contraction of the industry but raise barriers to prevent too great a fall in employment. In 1974, this protectionism was formalized in the Multi-Fibre Agreement (MFA), an accord between Third World countries and First World countries, which allowed greater access over time for Third World textile exports to first world markets but within the framework of as highly protectionist First World regime.
After this agreement it was decided to set up a new organization- the WTO. It was given greater powers and made responsible not just for promoting world trade but also for policing existing agreements. It has the power to make judgements on trading disputes and, if necessary, impose financial penalties on countries which break international trading agreements to which they are members.
Since the mid-1970s, the work of GATT and now the WTO has been made increasingly difficult by the emergence of, trading blocs. A few countries have been drawing closer together and offering tariff reductions to some countries but not others in contradiction to the most-favoured nation clause. The EU, for instance, has embarked on an ambitious programme under the 1992 Single Market banner, to remove a large number of obstacles to free trade without offering the same trading opportunities to non-EU countries.
The USA and Canada also signed an agreement in 1988 which effectively removed most trade barriers between the two countries. In 1994, this was extended to include Mexico under the North American Free Trade Association (NAFTA) agreement. If this were to carry on, it would be possible to see a world comprised of several large trading blocs, each with common external tariffs and free trade within the bloc. This would contradict the vision of GATT and the WTO which is to remove trade barriers between all countries.
It is argued that FTA's are not as successful at reducing overall tariffs and that the WTO should aim to allow only customs unions to be formed. With FTA's, a country can still set their own tariff levels but under a customs union negotiation can take place, and liberal countries would push for a lower common external tariff. This would reduce overall tariffs. Although in recent years the role of the GATT (now WTO) has tired against other hardened guidelines, it should not be underestimated how much their policies have reduced tariffs on a world scale.