International Trade Europe

While few doubted, in the post-war era, that in theory free trade produced a more efficient use of the world's scarce resources, its execution when the allocation of economic power was so lopsided struck various as disingenuous. There were good reasons why the Europeans–and the British in particular–would wish to proceed slowly on the road to multilateralism. As long as the United States dominated the world economy, with Europe and its firms in ruins, it was unclear just how broadly distributed the gains from trade would be.

(Fine, 393) If free trade benefited the Americans and nobody else, how just could such a policy be? Keynes, while no protectionist, was generally unsympathetic toward postwar American trade policy, which he viewed as dogmatic and detrimental to Britain's domestic policy goal of full employment. He preferred to retain the Imperial Preference system(Fine, 393) as a transition to freer trade, while agreeing that British action in removing preferences might be tied to the lowering of tariffs by the United States. (Fine, 393)

As ideas about the future trade order were being exchanged in 1945 and 1946, they were accompanied by fears that the United States would soon enter a postwar depression. If that had occurred, the economic repercussions would have been much worse than during the 1930s, given the immense and urgent need for European reconstruction. From Europe's perspective, the problem was that, in the event the United States slipped into a recession, its imports would likely fall and its exports pushed to third markets. How then would Europe be able to earn the foreign exchange needed to finance reconstruction?

These larger concerns about political economy and the future of American-style capitalism colored discussions between the United States and Britain over the trade order. The establishment of full employment policies was at the core of Britain's vision for the postwar world. If democratic governments failed, in the words of political scientist John Ikenberry, "to deliver the socioeconomic goods,"(Rawls, 6) the outcome might be the end of democracy; after all, a powerful alternative to capitalist democracy then existed in the Soviet Union.

Keynes “himself argued that democracy was a fragile institution, and that another depression "might easily mean the downfall of our present system of democratic government”. (Rawls, 6) By 1946, having established the Bretton Woods system and having held regular rounds of discussions on trade, the United States, Great Britain and other participating countries were ready to move toward drafting a charter for the ITO. “In fact, the United States and its allies were pursuing a two-track trade policy at this time.

On one track, negotiators were working on the GATT, whose primary purpose was to achieve multilateral agreement on the reduction of trade barriers. This was meant to be a temporary instrument; upon its establishment, the ITO was intended to subsume the GATT's functions, as well as tackle the broader issues of trade and employment”. (Rawls, 6) “Alas, early postwar hopes for the Bretton Woods order would not be realized. The international economy was suffocating from a lack of dollars, while the British economy tumbled into crisis.

The Marshall Plan was announced in June 1947, effectively marking the end of a brief era of multilateral dreams. The chances of winning broad U. S. congressional support for the ITO at such a time were thus minute. Instead, the narrower GATT agreement–concerned solely with the reduction of trade barriers–would be relied upon to advance the postwar allies' free trade objectives. No new trade organization would be established until 1994, when the World Trade Organization (WTO), succeeding the GATT, emerged out of the Uruguay Round of trade negotiations”. ( Stephan, 1995)

The GATT was founded on two key principles: nondiscrimination (most-favored nation status) and national treatment. Combined, these principles meant that the goods and services of any one party to a trade agreement would be legally valued in an equal manner with those of all other parties. Yet there was a third principle involved, albeit an implicit one: that of reciprocity. This notion raised far more serious issues of equity. As the GATT developed, the reciprocity principle came to mean that countries would negotiate reductions of tariff barriers on the basis of "equivalent exchange.

" In other words, if the United States were willing to provide $100 million in trade concessions, it would expect its trading partners to do the same. But trading on the basis of equivalent exchange was nearly impossible for the world's smaller economies. Indeed, little progress was made with trade liberalization until the formation of the European Economic Community (EEC) in 1957, which negotiated as a bloc during the Kennedy Round of trade agreements launched in 1962.