The Global Trading System
Vincent Ferraro, Ana Cristina Santos, and Julie Ginocchio

From 1686 to 1759 French law prohibited the importation of printed calicoes. Some 16,000 people lost their lives as a result of this law, either executed for violating the law or killed in riots driven by opposition to the law. It is difficult now to imagine the intensity of feelings generated by trade disputes in the past: it is unlikely that the U.S. Congress will mandate the death penalty for driving a Toyota. Nonetheless, trade disputes continue to raise high emotions. As the Cold War recedes as the principle focus of international relations, trade conflicts will become more frequent and more intense.

From a theoretical perspective, trade disputes should not exist. After all, economic doctrine assumes that nations freely exchange goods and services, and that the impersonal forces of supply and demand presumably determine the allocation of these resources. The pursuit of a more efficient allocation of resources, guided by the doctrine of comparative advantage, is held by many to be a genuinely universal objective, shared by all nations regardless of culture or history, time or space.

Nations, however, like individuals, are motivated by values sometimes quite different and even inconsistent with economic efficiency. If nations did not trade with each other, each nation would be able to pursue its different objectives in a manner consistent with the relative importance of each. Trade complicates this ranking process: it forces nations to make tradeoffs between efficiency and other possible values such as economic equity, social stability, environmental protection, or political representation. The intrusiveness of trade accounts for its political significance.

In the early modern period, most nations in Europe simply controlled trade so that its intrusiveness could be rigidly managed. The term mercantilism is generally used to describe this system of control. Generally speaking, mercantilist policies were designed to stimulate exports and depress imports so that the country would always have a favorable balance of trade, policies that were possible largely because of the heavy state involvement in economic activity through trading companies and the like. The favorable balance of trade represented an accumulation of wealth, which could then serve as a resource for the political and military aspirations of the state. At this time, there was no meaningful distinction between political and economic objectives, or, as Jacob Viner described it, between power and plenty.

The policies used to support mercantilist objectives were quite straightforward: the importation of certain products would be forbidden by law; the production of certain products in colonies governed by mercantilist states would be banned; subsidies would be granted to the producers of favored exports; and the state would take the necessary steps to assure a viable navy for the transportation of exports. Beyond these general policies, every state had specific measures reflecting its unique circumstances, but all mercantilist policies from this period reflect the strong political and economic interests of the state. As argued by Edward Meade Earle in 1943:

In short, the ends of mercantilism were unification of the national state and development of its industrial, commercial, financial, military, and naval resources. To achieve these ends the state intervened in economic affairs, so that the activities of its citizens or subjects might be effectively diverted into channels as would enhance political and military power.

As capitalism matured and economic and political rights began to adhere to individuals, the direct intervention of the state in administering economic activity became both less necessary and less desirable. In The Wealth of Nations (1776), Adam Smith articulated an economic system driven by the private interests of individuals, not the public ones of the state. More importantly, however, Smith argued that a "hidden hand" would actually transform these private and selfish interests into public benefit-greater economic activity and an economic surplus into which the state could tap, through taxation, for its security requirements. In other words, the free market could more efficiently channel economic activity than the state in ways that actually enhanced the power of the state: the private pursuit of plenty could also result in the public acquisition of power.

The struggle to realize this framework domestically was difficult and has yet to be fully resolved except in some of the advanced industrialized countries. Internationally, the struggle to create a free market has been significantly more difficult. In 1817, British economist David Ricardo wrote The Principles of Political Economy and Taxation, which extended Smith's argument to foreign trade and advocated free trade on the basis of comparative advantage. Ricardo tried to prove that if two countries engage in trade, each should specialize in whichever goods it produces relatively well: even if one of the countries is better at producing every product, it can still benefit from trade by emphasizing the products it produces best and importing those products it which it is only relatively inefficient at producing. Since Ricardo's time, mainstream economic doctrine has accepted this proposition and has argued that unrestricted trade results in vastly expanded production and, hence, greater wealth.

The fight to implement and impose free trade practices globally was led first by Great Britain and subsequently by the United States. In truth, neither state fully subscribed to the principles of free trade, but the rhetorical support provided by each to the principles was almost religious, as well-described by Lord Maynard Keynes:

I was brought, like most Englishmen, to respect free trade not only as an economic doctrine, which a rational and instructed person could not doubt, but also almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage. I thought England's unshakable free trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before Heaven of her economic supremacy.

The British maintained a very elaborate and sophisticated set of trade preferences within the Empire but often abandoned its free trade practices outside the Empire whenever such exceptions seemed appropriate.

The Post World War II Trade Regime

Nonetheless, the doctrine of free trade is an unquestionably powerful idea and since the end of World War II it has been championed by the United States and has served as the measure of determining governmental policy for many states in the international system. In the late 20th century, a very strong movement toward freeing trade further has occurred: the policies of some of the more protectionist states in the system-Brazil, China, India, Russia, and France-have moved toward strong liberalization. One should not interpret this movement as irreversible since attitudes toward trade historically can change very rapidly. But at this particular point in time, there is little question that free trade is being aggressively pursued by most of the major economic powers.

The idea of free trade is seductively simple: barriers to the free flow of goods and services, such as tariffs and quotas, should be reduced to zero. Individual entrepreneurs would invest their capital in those areas in which they would make the most profit. Global production would then increase dramatically as greater efficiencies of production are realized, and, as a result, the wealth of the world would increase.

There is no question that increased trade among nations shows a clear correlation with increased wealth on a global scale. In 1820 world Gross Domestic Product (GDP) was estimated to be around $695 billion (US 1990$); by 1992 world GDP had increased to $27,995 billion (US 1990$). World exports were about $7 billion (US 1990$) in 1820 and by 1992 they had increased to about $3,786 billion (US 1990$). Stated another way, exports accounted for only about 1 percent of world product in 1820. By 1913 exports accounted for about 8.7 percent, and by 1992 the figure was about 13.5 percent. Increased trade is certainly partially responsible for the dramatic increase in wealth in the last two centuries.

Trade is also heavily concentrated. The top ten exporters accounted for over sixty percent of global exports; the top ten importers accounted for almost 58 percent of world imports (See Table 1). Indeed, the top fifty exporters accounted for 96.1 percent of all world exports, which means that around 135 countries only account for 3.9 percent of world exports. This concentration of trade reflects the concentration of global economic activity and does not suggest that trade cannot be of crucial importance to small countries.

One can also support free trade because its alternative, protectionism, is viewed as a dangerous policy. The commitment of the United States to free trade can be partially explained by the disastrous experience of the United States during the Great Depression. The decision of the United States to erect significant tariff barriers against foreign products as a way of stimulating internal demand was entirely counterproductive and led instead to a deepening of the Depression. While the decision to raise tariffs, most dramatically in the case of the Smoot-Hawley tariff, was consistent with most of American economic history, the leaders of the United States decided that its post-World War II economic policies would be quite different, and they adopted a strong free trade position as the hallmark of American power. Thus, the United States helped create and maintain the Bretton Woods System whose institutions-the International Monetary Fund (IMF), the World Bank, and the General Agreements on Tariffs and Trade (GATT)-were committed to free trade.

Table 1

Top Ten Global Exporters and Importers of Merchandise
1995 (billions of US$)

Exporter Value Share of World Exports Importer Value Share of World Imports
United States 583.9 11.6 United States 771.3 14.9
Germany 508.5 10.1 Germany 443.2 8.6
Japan 443.1 8.8 Japan 336.0 6.5
France 286.2 5.7 France 274.5 5.3
United Kingdom 242.1 4.8 United Kingdom 265.3 5.1
Italy 231.2 4.6 Italy 204.0 3.9
Netherlands 195.3 3.9 Hong Kong* 196.1 3.8
Canada 192.2 3.8 Netherlands 175.9 3.4
Hong Kong* 173.9 3.5 Canada 168.4 3.3
Bel-Luxembourg 168.3 3.3 Bel-Luxembourg 154.2 3.0

Source: World Trade Organization, Focus, No. 14 (December 1996),, p. 5.
*Hong Kong had domestic exports of $29.9 billion and re-exported $143.9 billion. Its retained imports in 1995 totaled $52.1 billion.

Although not the most powerful of these institutions, the GATT is the organization most centrally concerned with establishing the global free trade regime. In 1945 the United States invited twenty-two other nations to join it in drafting an agreement that would multilaterally reduce tariffs and other barriers to trade. The negotiations held in Geneva in 1947 resulted in the GATT, which at that time was only provisional. The plan was to incorporate eventually the GATT into the proposed International Trade Organization (ITO). The ITO never came into being because of opposition, primarily from the United States, to its powers of regulating trade. The GATT took over some of the duties of the stillborn ITO, such as settling disputes and providing information about tariffs and quotas.
Over the years more countries joined the GATT, and the Contracting Parties felt the need to meet in what came to be known as trade negotiating rounds. Eight such rounds have taken place, the last three being the longest and most important: the Kennedy, Tokyo, and Uruguay Rounds.

The Kennedy Round was initiated in 1962 and concluded in 1967. Its major contribution was the introduction of multilateral trade negotiations. Previously the common practice had been to settle tariffs item by item. The new procedure introduced by the Kennedy Round treated every tariff as roughly comparable: if an item was not listed as an exception by a country, its tariff would be set at the general rate agreed upon by the country. Additionally, four main issues were discussed at the Kennedy Round: industrial tariffs, agriculture, non-tariff barriers, and the integration of developing countries into the global economy through trade. Progress on reducing industrial tariffs was quite successful: the value of trade covered was about $40 billion and the talks affected about 40 percent of the goods imported by industrialized countries. Progress was more limited in the remaining three issue areas: agricultural restrictions proved intractable due to the political significance of farming in many countries; non-tariff barriers, such as quality standards and labeling regulations, were difficult to identify and assess; and the problems of overcoming poverty in developing countries by facilitating their trade through preferences involved concessions the industrialized countries were unwilling to make.

Despite the successes in reducing industrial tariffs, the Kennedy Round failed to meet the expectations of many of the participants. One of its biggest drawbacks was that the negotiators continued to rely upon the reciprocity clause: a country would reduce its tariffs only if its trading partners did likewise. Countries were unwilling to import more unless its exports increased by a similar amount. Developing countries were also not treated as full participants in the negotiations: the United States, the European Economic Community, and Japan dominated the discussions.

The Tokyo Round opened in 1972, triggered by the withdrawal of the United States from the gold standard in 1971. Ninety-nine countries, members and non-members of GATT, participated in the extensive negotiations that would only be concluded seven years later. The Round resulted in the reduction of hundreds of tariffs and steps toward the quantification and elimination of non-tariff barriers to trade. Six major Codes of Conduct were articulated, including the Standards Code, which attempted to regulate non-tariff barriers. As was the case with the Kennedy Round, actual adherence to these new standards has been quite spotty, and, again, developing countries were not offered structural concessions.

The world had recognized that poorer countries need different treatment in the area of trade. There are two major trading institutions which try to compensate for the difficulties faced by poorer countries: the Generalized System of Preferences (GSP) and the tariff preferences extended to 70 African, Caribbean, and Pacific countries through the European Union's Lome IV Convention. These two systems grant lower tariffs, and, in some cases, duty free status to developing countries. The system of preferences certainly made it easier for poor countries to export their traditional products, but it also made it difficult for them to diversify their exports, particularly toward manufactured and semi-manufactured products. As the world moves closer toward a lowering of all MFN tariffs, however, the advantages offered by these two systems will inherently decline.

The Uruguay Round was the most important and most comprehensive of all rounds. Initiated on September 20, 1986 in Punta del Este, it was stalled for three years due to conflicts between the United States and the European Union over agricultural trade. The credibility of multilateral negotiations was at stake during those years; if the disputes had not been settled, the global framework of international trade might have succumbed to protectionism and bilateral agreements. A compromise was reached in December 1993 in Geneva, and the final text was signed the following March in Marrakech.

The Uruguay Round was a watershed in the history of the GATT. The jurisdiction of the agreement was extended to issues which many countries had reserved to their national sovereignty: services, textiles, and agriculture. The establishment of the World Trade Organization (WTO) was its greatest accomplishment. The WTO has the power to actually resolve disputes, putting an end to further multilateral rounds of negotiations. Unlike GATT decisions, those made by the WTO are binding. More complex and far-reaching then the GATT, the WTO is the successor to GATT (and the reincarnation of the ITO).

Established in Geneva on January 1, 1995, the WTO already has over 120 members. Its additional functions include implementing all multilateral trade agreements and overseeing national trade policies. In December 1996, the WTO held its first biennial Ministerial Conference in Singapore, and concluded the Information Technology Act which dealt with matters concerning protection of intellectual property rights associated with new electronic technologies. The Ministerial Conference is the WTO's highest authority, and is composed of the trade ministers from every single member. Several bodies and committees work around a General Council in the Geneva headquarters of the WTO. So far, only minor issues have been turned over to the WTO for resolution (such as bananas and Costa Rican underwear). At this stage it is impossible to assess the effectiveness of the WTO: the question of whether it will be able to enforce its decisions in those cases remains an open question.

Exceptions to a Global Free Trade Regime: Regional Trading Blocs

The WTO will be operating in a global environment, which is, in some respects, more favorable to the idea of freer trade, but organized along regional lines. Article XXIV of the GATT allows for regional institutions to establish their own free trade areas as potential way stations to a global regime:

The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements.

There are many such agreements in the world, but these agreements are far from uniform in scope. There are different levels of integration in the world, and each regional organization deals with the issue of national sovereignty differently. A free trade area (FTA) is the simplest form of trade alliance: barriers to trade only among member states are lowered, and each country remains independent with respect to non-members of the FTA. Custom Unions go one step further: they establish a common external tariff (CET) which applied uniformly to non-members. At the most sophisticated level of regional integration, nations form a common market in which there is, in addition to free mobility of the factors of production (capital and labor), a common trade policy and the harmonizing of national economic legislation.

The process of regional integration has grown steadily since the end of World War II. In the early 1950s many believed that the tensions between France and Germany could only be reduced if the two were tied together economically. The European Coal and Steel Community (ECSC) was created, and it served as a stepping-stone to the Treaty of Rome (1957) which gave birth to the European Economic Community (EEC). The EEC has evolved over the years and is still involved in arduous negotiations to achieve a higher level of political and economic integration, including the creation of a common currency. From an initial group of six, it now consists of fifteen countries, and other nations have applied for membership.

The North American Free Trade Agreement (NAFTA) and Mercosur are more recent regional trade alliances. NAFTA was signed by the United States, Canada, and Mexico in 1992, and entered into force on January 1, 1994. The Treaty of Asunción, which created Mercosur, was signed by Brazil, Argentina, Paraguay, and Uruguay in March 1991, and was implemented on January 1, 1995. As of now, both agreements are free trade areas, which aim to withdraw all barriers to the exchange of goods, services, and capital only among the member nations. Mercosur, however, plans to eventually become a common market and follow the European example; it is now, however, only a semi-functioning customs union.

Both NAFTA and Mercosur are currently reviewing membership applications from other Latin American nations, and, at the Summit of the Americas in 1994, thirty-four countries supported the creation of the Free Trade Area of the Americas (FTAA). The path toward such integration will not be an easy one, especially because the area involved is much more heterogeneous than Europe. Some initial efforts have been made, but it remains to be seen if the United States in particular is willing to pursue and support some form of hemispheric integration.

Overall, regional trading blocs account for about 61 percent of all trade, a very high percentage. C. Fred Bergsten estimates the different shares for the main blocs in the world today:

Regional Free Trade Arrangements
(share of world trade, 1994)

European Union 22.8
Mercosur 0.3
Free Trade Area of the Americas 2.6
AFTA 1.3
Australia-New Zealand 0.1
APEC 23.7

TOTAL 61.0

Source: C. Fred Bergsten, "Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century, Institute for International Economics, APEC Working Paper 96-15, 1996,

Quite clearly, the regional trading blocs are highly significant actors in world trade. Their danger is that, although they are expected to be mere way stations to a global free trade regime, they also represent institutional interests that may actually restrict trade.

Exceptions to a Global Free Trade Regime: Economic Protection

By far the most important exceptions to free trade come from pressures to protect a domestic economy from international competition. The techniques for such protection include tariffs, quotas, export subsidies, government procurement policies, quality, safety, and health regulations, and a whole host of other pricing mechanisms. In 1993, the World Bank and the Organisation for Economic Cooperation and Development (OECD) estimated that protectionist measures cost the global economy about $450 billion a year. At the global level, the arguments supporting free trade are probably unassailable: free trade unquestionably stimulates more efficient production and, as we have seen, greater wealth.

Nations, however, are not asked to defend a global perspective; they are expected to defend national interests. While free trade may actually create jobs by stimulating demand and lowering prices, free trade cannot guarantee that those who lose their jobs because of their higher wages will be hired to fill the new jobs created by the economic stimulus. It is this asymmetry of benefits, distributed unequally among different countries, and among different products and different workers, which creates powerful opposition to free trade.

Quantifying the effects of freer trade is extraordinarily difficult, as demonstrated by the problems in determining the effects of the North American Free Trade Agreement (NAFTA) on the U.S. and Mexican economies. A recent study conducted by the University of California at Los Angeles suggests that the overall effects of NAFTA since it was signed in 1994 have been quite modest:

Using a new model of how exports and imports influence jobs in various product categories and regions, the study estimated that the net job gain to the United States since the agreement took effect at the beginning of 1994 has been just 2,990 jobs. The net figure, however, masked a much greater level of both job losses and gains among different companies. Increased imports to the United States killed an estimated 28,168 jobs the last three years, the study said, while increased exports supported creation of 31,158 jobs.

Obviously the people who lost their jobs or their businesses feel that NAFTA was a bad decision. The people who gained jobs or who benefited from lower prices for the products they purchased feel that NAFTA was a good decision. The difficulty for a policy maker is determining what the overall effect on the national economy is by freer trade, including the costs of addressing the needs of those who lose their jobs or businesses.

Those who support greater protection against economic competition from abroad argue that domestic producers will move to countries where cheaper labor is available, or where regulations, such as environmental or safety controls, are minimal. Indeed, the logic of free trade is that producers ought to move to places in which higher profits can be made so, to the extent that such considerations are important, one would expect changes of this nature. It is difficult to determine, however, the extent to which such considerations are decisive. For example, there has not been a documented massive shift of manufacturing from the United States to Mexico or to any other country in which labor costs are substantially lower than in the United States. The manufacturing share of the U.S. economy has not drastically changed in the past thirty years (21% of the U.S. economy). It is clear that lower labor costs or reduced regulations are not the sole determinants of business decisions to relocate: in some cases they may be, but it other cases, access to skilled labor or the presence of a sophisticated infrastructure may be more important.

What is clear is that appeals to protection from free trade constitute a powerful political issue. There is no question that some jobs have been lost because of NAFTA and many believe that the U.S. Government has a responsibility to protect Americans from job erosion. Presidential hopeful Pat Buchanan made this issue a central part of his campaign in 1996:

To "conservatives of the heart," even if NAFTA brings an uptick in GNP it is no good for America. No matter the cash benefits, we don't want to merge our economy with Mexico. We don't want to force American workers to compete with dollar-an-hour Mexican labor. That's not what America is all about.

In many countries there are provisions for helping workers whose jobs are lost due to trade, but it is hard to assert that those programs are especially successful. By and large, trade-displaced workers are older, less educated, and less mobile than workers who are attractive to the more dynamic sectors of an economy.

Additionally, one should always be aware that justifications for trade protection are also defenses of relative inefficiency. Tariffs and quotas are costs to an economy, ones usually borne by the consumer. They can protect workers, but, in the process, they can also protect the private corporate interests of those who hire the workers. In the early 1980s the automobile industry in the United States was at a competitive disadvantage to Japanese producers and lobbied for protection against imported automobiles. After a quota was implemented, the prices of automobiles when up rather dramatically. The American industry announced that the quota saved about 22,000 jobs. The quota also increased the profits of the industry. However, the price increase led to a sales drop of about one million cars which in turn led to a loss of about 50,000 jobs in the industry.

Exceptions to a Global Free Trade Regime: National Security Concerns

The ideal of global free trade faces a challenge when viewed in light of national security concerns. Nations do not wish to export products to their adversaries which might have the effect of enhancing their relative power, even if the private interests producing those products have an interest in increasing their sales. During the Cold War, the economic benefits of free trade were overridden in many cases by national and multilateral export controls on strategically sensitive products. The formal agency responsible for maintaining these controls was the Coordinating Committee for Multilateral Export Controls (COCOM) aimed to protect the West's security interests by placing restrictions on nuclear, conventional, and dual-use technologies that might have strengthened the Soviet's military position in the Cold War. COCOM, established in 1949, included Japan and all of the NATO countries except Iceland.

COCOM restrictions on strategic trade were partially effective in limiting the transfer of strategic materials to the Soviet bloc, but were never wholly successful. It proved to be extremely difficult to identify which products were of strategic value. For example, in 1972 the United States gave the Bryant Grinder Corporation authorization for a shipment of precision miniature ball-bearing grinders to the Soviet Union, which later proved to be used in Soviet guided ballistic missiles. Other COCOM states had also shipped similar types of equipment to the Soviet Union. Similarly, computer technology proved to be extraordinarily difficult to define in strategic terms: many items could be used for military purposes, and it was impossible to define those items, which could not somehow be adapted for strategic purposes.

The end of the Cold War has lessened the possibilities for effective controls over strategic exports, and COCOM was dissolved on March 31, 1994. The need to control such material however, still persists, particularly over those materials and technologies used in nuclear weapons production and delivery. Currently, the effort to restrict such exports is guided by the Missile Technology Control Regime (MTCR) which was formed in 1987. There are about 25 nations which have announced adherence to these controls which are described by the Arms Control and Disarmament Agency in these terms:

The MTCR is neither a treaty nor an international agreement but is a voluntary arrangement among countries which share a common interest in arresting missile proliferation. The Regime consists of common export guidelines applied to a common list of controlled items. Each member implements its commitments in the context of its own national export laws.

Such controls have never been regarded as inconsistent with a free trade regime, but if the definition of strategic were to expand significantly to include many computer and information technologies, the effects on international trade may be considerable.

Exceptions to a Global Free Trade Regime: Human Rights

Trade is often used as a mechanism for influencing the policies of states. The United States signaled its displeasure at the Japanese invasion of Manchuria by cutting off certain vital exports to Japan. The loss of its supplies of oil and iron ore simply reinforced the position of those in Japan who argued that further armed expansion was the only solution to the vulnerability of a relatively resource-less island. On the other hand, the trade embargo against South Africa, while far from complete, ultimately succeeded in persuading the Nationalist Government that continued isolation from the rest of the world was more costly to South Africa than the establishment of majority rule. In both cases, trade was manipulated as a diplomatic instrument to achieve a certain objective.

Many simply disagree with the use of trade as a policy tool. For them, economics should follow its own logic and its purposes should not be subordinated to the political interests of the state. This position suggests that, over time, the forces of economics will slowly persuade states to cooperate more effectively, no matter what the ideological or political differences among them. Moreover, many argue that using trade as a lever for inducing change is simply ineffective. The failure of the United States embargo against Cuba to force a change in the Cuban government is a case in point.

There is probably no way to separate trade from politics, and it would be naïve to suggest otherwise. Trade restrictions are often reflections of domestic politics within states much more than they are actually well considered mechanisms of change. Perhaps the most visible case of trade politics in recent years has been the dispute between the United States and the People's Republic of China over a U.S. extension of Most-Favored-Nation (MFN) status to the Chinese.

Most-Favored-Nation status simply means that the restrictions on trade between two nations will be no more onerous than the least restrictions offered to any other single state with whom trade occurs. The status does not confer any special advantage: it merely prohibits a specific disadvantage which could possibly be directed against a single state. MFN is a crucially important status because it allows states to compete more or less equally within the global trading network.
As China has become one of the most significant factors in United States trade, importing in 1995 about $12 billion from the United States and exporting about $45 billion to the united States, the question of whether China should be granted MFN status has become critically important. There are some who oppose MFN status to China simply because they believe that the United States cannot compete with Chinese products, and an influx of Chinese goods would cost Americans jobs, arguments similar to those developed earlier in the section on protectionism. There are others, however, who argue that the absence of political freedoms in China renders China an unfit trading partner. They suggest that the United States should threaten to restrict Chinese exports to the United States unless China adopts a system of human rights more compatible with Western values.

There is very little question that the Chinese have a profoundly different system of politics than does the United States. Moreover, there is very little question that many Americans find Chinese practices, particularly the treatment of political dissidents, to be abhorrent. It is difficult, however, to accept the proposition that American political practices should be the standard by which all nations should be judged. Indeed, the United States itself might be found lacking in adherence to its own principles in many respects. The Chinese argue that its internal political system accurately reflects the values of its society, and that its internal politics are not subject to evaluation or judgment by outsiders. In some respects, the world has already answered this objection. The precedents established by the Nuremberg and Tokyo Trials after World War II effectively dismissed the possibility of politics ever being a purely "domestic" matter-the position was only reinforced by subsequent actions against South Africa.

Which side is right? Initially, the United States took the position in 1993 that MFN status would not be conferred unless human rights practices in China changed dramatically. Subsequently, however, the United States changed its position, and, in 1996, granted China MFN status for a year. Presumably, that status will be renewed unless Chinese actions change dramatically for the worse.

In some sense, the Chinese had clearly won a victory over United States policy-trade would flow freely between the two nations, and no conditions were imposed on Chinese behavior. Nonetheless, this interpretation of the outcome is overly simple. United States pressure certainly discomfited the Chinese, and the publicity surrounding certain dissidents in China and the possibilities of prison labor for profit damaged China's reputation globally.

The more important point, however, was much simpler: the United States decided that its ability to influence Chinese domestic political practice through trade was minimal. This pragmatic observation led to the decision that opening trade further might lead to political changes within China more rapidly than a coercive approach, which tried to punish China for its human rights practices. As is the case with most pragmatic decisions, time will tell.

Exceptions to a Global Free Trade Regime: Environmental Protection

The most recent exceptions to the free trade system revolve around the growing concern over how environmental regulations may be subverted by corporations moving their operations to states with lax environmental controls. There is scant systematic evidence to document how extensive this problem may be, but there are a number of examples which suggest that the problem may be widespread. Arlene Wilson of the Congressional Research Service observed that "a number of studies have shown that trade liberalization may reduce a country's overall welfare if environmental resources are incorrectly priced." It is difficult, however, to know how to price correctly environmental protection, particularly since, in the international arena, attitudes toward balancing the values of economic development and environmental protection may differ profoundly.

In making environmental standards a part of NAFTA, the United States, Canada, and Mexico have set the stage for increased debate between environmental activist organizations and advocates for freer trade. The NAFTA set up a side agreement known as the North American Agreement on Environmental Cooperation (NAAEC). This agreement provides a mechanism in which disputes over environmental regulations may be settled outside of the NAFTA framework.

Environmentalists feared that American businesses would flock to Mexico to produce more cheaply by avoiding costly U.S. environmental regulations. There is not yet sufficient information to assess whether this fear was or is justified. There seems to be wide consensus that "dirty" industries "have expanded faster in developing countries than the average rate for all industries over the last two decades - and faster than in industrial countries. It is uncertain, however, whether this international pattern merely reflects growth - or industrial migration as well." The creation of the side agreement was clearly an initiative sparked by domestic concerns within the United States, and the rhetorical level of support for environmental protection was quite high. Former Secretary of State Warren Christopher affirmed that the United States is "striving through the new World Trade Organization to reconcile the complex tensions between promoting trade and protecting the environment-and to ensure that neither comes at the expense of the other." Whether this balance can be attained remains to be seen. It is unlikely that freer trade would substantially increase the opportunities for new environmental degradation; it might, however, certainly intensify current problems.

The Critique of the Free Trade Regime

The exceptions to the practice of free trade listed above are generally regarded as practical concessions to the political realities of the international system; they are, in some respects, modifications or reforms designed to accommodate interests which find the demands of the free market inconsistent with other values such as equality and justice. There are many, however, who believe that free trade cannot be reconciled with these other values. These critics argue that the free trade regime is in fact a political system-an imperialist system-engineered to maintain the power of the advanced industrialized countries at the expense of the poorer countries.

There are a number of variations to this argument and it is simply impossible to develop them in any detail in this essay. Marxists, dependency theorist, and liberal reformers all share some basic elements of the critique. What separates their analyses is the extent to which the system can be changed, what the nature of those changes have to be, and whether the changes have to involve the fundamental premises of the capitalist system.

The analysis of the problem is straightforward: free trade favors the more developed economies and this bias channels wealth from the poor to the rich. This process has been going on for centuries and the cumulative effect of the bias is the growing income gap between rich and poor. Powerful states, therefore, adopt free trade because it increases their power. Bismarck once noted that:

England had the highest protective duties until she had been so strengthened under the protection that she came forward as a herculean fighter and challenged everybody with, 'Enter the lists with me.' She is the strongest pugilist in the arena of competition, and is ever ready to assert the right of the strongest in trade.

From this perspective, free trade is nothing more than a mercantilist policy designed to enhance the power of a state relative to others.

The critics of free trade argue that the openness of the free trade regime exposes poorer countries to competition, which is patently unfair. Rich countries have access to capital, technology, transportation, and markets, which are generally unavailable to poorer countries. The poor countries can sell their labor and their land in the form of primary commodities. Both of these factors of production are in great supply and therefore the demand for them is low. Free trade, therefore, creates a context in which poor countries have few avenues of escape: their products are less valuable than the products of the rich countries and their relative poverty only increases the more they participate in the free trade regime.

The critics of the free trade regime stand solidly on their description of the international distribution of wealth. Since the mid-1800s, wealth and income have become increasingly concentrated in the industrialized nations. There is little question that poor countries have had a more difficult time catching up to the rich countries as free trade practices have become more global. The liberalizing of trade after the Tokyo Round did not significantly improve the status of poorer countries:

Since the end of the Tokyo Round in 1979, the average level of industrial tariffs in developed countries has fallen by nearly a half to 6.4 per cent and the value of total world merchandise trade has grown by a remarkable 4.8 per cent per year. This growth is mainly confined to the industrialized countries: in the 1980s, developing countries' exports grew by only l.6 per cent, and their share of world trade fell from 28 to 21 per cent.

There is no question that some developing countries have benefited from the expansion of trade opportunities in the post-World War H period. Many countries in East Asia -- Singapore, Hong Kong, Malaysia, Taiwan, and South Korea -- deliberately pursued an export-led strategy that resulted in impressive growth in their Gross Domestic Products. However, other countries have not been able to use trade as an "engine of growth." These countries, many of them in Africa, export primary commodities for which demand has been declining over time. The expansion of free trade into the agricultural sectors of these economies poses serious threats to the fanning communities in many of these areas. While it is probably safe to say that free trade will always benefit the wealthy, one must be more cautious in implementing free trade commitments for the poor. For them, trade will never be enough.

Challenges to the Future of the World Trading System

There are three primary concerns that have emerged out of the recent expansion of the free trade regime. The first is over the ways by which the trade system is connected to the larger economic process of globalization. The World Trade Organization, in its Annual Report for 1995, notes the significance of the connection:

In virtually every year of the postwar period, the growth of world merchandise trade has exceeded the growth of world merchandise output. Overall, the volume of world merchandise trade is estimated to have increased at an average annual rate of slightly more than 6 per cent during the period 1950-94, compared with close to 4 per cent for world output. This means each 10 per cent increase in world output has on average been associated with a 16 per cent increase in world trade. During those 45 years, world merchandise output has multiplied 5½ times and world trade has multiplied 14 times, both in real terms.

Nations trade because there are differences in production possibilities and costs among nations. While some of these factors are fixed, others, like the cost of labor, are not. When production changes location because of these differences in costs, the demand for these factors of production changes as well. For example, the demand for high-wage labor may be reduced because of the availability of low-wage labor, which then leads to a reduction in the high wages. We know that this transformation has in fact occurred, since trade is increasing at a faster rate than production.

The fear that freer trade will depress high wages and lead to a mass exodus of jobs from the industrialized countries to the lower wage poorer countries is genuine, and manifests itself in a vision of a global network of sweatshops. As suggested above, there is little systematic or global evidence to document the extent to which this fear is legitimate. But the most important issue facing the WTO is the internationalization of standards-labor and environmental-implicit in the process of opening trade even further.

The issue is extremely complicated. Evening out the differences vitiates the efficiencies gained by comparative advantage; ignoring the differences assures strong political opposition to opening up markets. Further, there is no way to measure accurately the quality of life standards raised by questions concerning wages and environmental protection-what is a decent, living wage? What is a "clean" environment? How does one account for the cultural variations in the definitions of these criteria? Finally, the internationalization of these standards poses a serious challenge to the idea of state sovereignty. When an international organization such as the WTO or the International Labour Organization (ILO) begins to dictate working conditions within a country, serious questions arise about the ability of states to manage their own domestic affairs.

The second major challenge facing the world trading system concerns its ability to enforce its rules. The conclusion of the Uruguay Round and the creation of the WTO reflect the economic and political power of "new" entrants to the global economy: most importantly China and the states of the former Soviet Union. Additional impetus for the new structures came from states that changed their trade policies toward more liberalized trade: India and Brazil. The more traditional supporters of free trade, the United States and several of the European states, actually saw domestic support for free trade decline.

That free trade expanded under recent conditions is not especially surprising in light of historical experience: in good economic times, free trade typically expands. The real strength of the new trade regime will be tested when an economic downturn occurs. Under conditions of economic stress, domestic pressures for protectionist measures increase dramatically. The WTO has a Dispute Settlement Body and an Appellate Body to enforce the rulings of the WTO, but the general effect of these enforcement mechanisms thus far has been to persuade nations to resolve their disputes "out of court." Such resolutions of trade disputes are important and should not be discounted; nonetheless, it remains to be seen whether the WTO has the ability to enforce unpopular decisions on powerful states.

The third and final challenge to the world trading system is the presence, persistence, and expansion of global poverty. It is a mistake to think that the WTO can address this problem on its own. It is also a mistake, however, to think that an uncritical pursuit of free trade will help all countries equally. One of the clear characteristics of trade is that it rather faithfully represents the distribution of economic power in the international system. That some poor countries have been able to use trade to stimulate their economies to grow at rather rapid rates is an important reason to support free trade in principle. But it cannot be used as a blanket justification for policies that expose very poor societies to economic competition that undermines their viability.

The current distribution of wealth is not defensible, either in moral or in practical terms. There are far too many people on the planet who lead lives of total desperation: over a billion people are malnourished, ill housed, and cut off from adequate education, medical care, clean water, and a safe environment. Free trade will not, on its own, pull these people into prosperity. Moreover, in a free trade regime, the economic fortunes of the rich countries are inextricably linked to the fortunes of the poor. Free trade has a convergence effect, although the power of that effect is not clearly measurable. if industries do migrate to low wage areas, then the tendency will be for high wages to fall. At some point, the reduction in wages will have a depressing effect on demand for products and this reduction will unquestionably lead to lower rates of economic growth, perhaps even negative growth rates.

This challenge to the free trade regime is not dramatic or immediate, but it is inexorable. Nor does it suggest that free trade itself should be abandoned as a general principle. But the challenge of global poverty demands that richer countries think about trade as a way of helping poor nations integrate more successfully into the global economy. Such integration will require concessions to protect the weak economic infrastructures of many countries from the rather unforgiving rigors of free trade.