World Trade Organization (WTO),

World Trade Organization (WTO), international body that promotes and enforces the provisions of trade laws and regulations. The World Trade Organization has the authority to administer and police new and existing free trade agreements, to oversee world trade practices, and to settle trade disputes among member states. The WTO was established in 1994 when the members of the General Agreement on Tariffs and Trade (GATT), a treaty and international trade organization, signed a new trade pact. The WTO was created to replace GATT.

The WTO began operation on January 1, 1995. GATT and the WTO coexisted until December 1995, when the members of GATT met for the last time. Although the WTO replaced GATT, the trade agreements established by GATT in 1994 are part of the WTO agreement. However, the WTO has a significantly broader scope than GATT. GATT regulated trade in merchandise goods.

The WTO expanded the GATT agreement to include trade in services, such as international telephone service, and protections for intellectual property—that is, creative works that can be protected legally, such as sound recordings and computer programs. The WTO is also a formally structured organization whose rules are legally binding on its member states.

The organization provides a framework for international trade law. Members can refer trade disputes to the WTO where a dispute panel composed of WTO officials serves as arbitrator. Members can appeal this panel’s rulings to a WTO appellate body whose decisions are final. Disputes must be resolved within the time limits set by WTO rules.

All of the 128 nations that were contracting parties to the new GATT pact at the end of 1994 became members of the WTO upon ratifying the GATT pact. By 2002 the WTO had 144 members, and about 30 other countries had applied for membership, including Russia, Saudi Arabia, and Vietnam.

The WTO is based in Geneva, Switzerland, and is controlled by a general council made up of member states’ ambassadors who also serve on various subsidiary and specialist committees. The ministerial conference, which meets every two years and appoints the WTO’s director-general, oversees the General Council.

Since its creation, the WTO has attracted criticism from those concerned about free trade and economic globalization. Opponents of the WTO argue that the organization is too powerful because it can declare the laws and regulations of sovereign nations in violation of trade rules, in effect pressuring nations to change these laws. Critics also charge that WTO trade rules do not sufficiently protect workers’ rights, the environment, or human health.

Some groups charge that the WTO lacks democratic accountability because its hearings on trade disputes are closed to the public and press. WTO officials have dismissed arguments that the organization is undemocratic, noting that its member nations, most of which are democracies, wrote the WTO rules and selected its leadership. WTO supporters argue that it plays a critical role in helping to expand world trade and raise living standards around the world.

Criticism of the WTO reached an apex in late 1999, when more than 30,000 protesters disrupted a WTO summit in Seattle, Washington. The protesters called for reforms that would make the organization more responsive to consumers, workers, and environmentalists. The summit failed in its goal to set an agenda for a new round of global trade talks, largely because of disagreements between industrialized and developing nations.

However, in 2001 at a summit in Doha, Qatar, WTO members overcame their differences and agreed to an agenda for a new round of talks. Among other goals, the talks were to focus on reducing trade barriers and lowering tariffs.

Commercial Treaties

I COMMERCIAL TREATIES

Commercial Treaties, formal agreements concluded between states for the purpose of establishing mutual rights to, and regulating conditions of, trade and navigation in the territories of the signatories. Provisions often cover the rights of nationals of one party to reside in the territory of the other and to acquire and hold property there;

Consular jurisdiction.
Rights of asylum in time of war.
Fishing rights; regulation of free ports.
Conditions governing the collection of debts due a foreign trader and those governing the Taxation of foreign investors.

II CONDITIONS OF TREATIES

Present-day commercial treaties are ratified according to the constitutional procedures of the participating parties. The treaties may be terminated unilaterally on notice of six months or a year. However, termination also may occur if the time period during which the treaty is in force expires, if the same parties negotiate another treaty on the same subject, or if the political status of a signatory changes.

The outbreak of war suspends but does not terminate commercial treaties. If a dispute arising among signatories over the interpretation of commercial treaties cannot be settled by direct negotiation, it may be settled by rules of international law. Such disputes must be submitted to the International Court of Justice if the signatories have mutually accepted the jurisdiction of that court in advance .

III TRADE AGREEMENTS

In addition to formal agreements between modern states having important economic ties with each other, less formal and durable agreements relate to such matters as tariff rates, navigation dues, customs formalities, air-transport clearance arrangements, quantity restrictions on trade in specific commodities, regulation of commercial, financial, transportation, and communication facilities, standards of commercial and maritime law, commercial arbitration, patents, trademarks, and copyright.

Reciprocal trade agreements characteristically provide that import duties on products originating in the signatory countries be lower than the duties on the same classes of articles imported from other nations. Although tending to discriminate against third countries, such special arrangements can be justified when political, economic, and geographical ties are particularly close, as in the Commonwealth of Nations or among Latin American countries. The advantages thus obtained are offset in part through operation of the most-favored-nation clause.
IV MOST-FAVORED-NATION CLAUSE

The most-favored-nation clause stipulates that a nation will extend to other signatories treatment comparable to that accorded any other nation with which it has, or may have in the future, a commercial treaty. Under such a clause, all existing rights and privileges granted to other nations became immediately applicable to the signatory nations, and all rights and privileges granted to other nations in later treaties become applicable to the parties to the most-favored-nation agreement as soon as those treaties take effect.

The clause may be either unconditional, that is, applicable to all subjects omitted from the negotiations as well as to those included; or conditional, that is, limited to particular items or areas of trade. The basis for restriction of the applicability of the clause is the theory, once widely held, that concessions granted to one nation in return for special advantages should not be granted to other nations without similar considerations. Although a conditional form of the most-favored-nation clause was at one time included in most commercial treaties made by the United States, the simpler unconditional and mandatory form has been used in all U.S. commercial treaties concluded since 1922.

VII HISTORY OF COMMERCIAL TREATIES

Commercial treaties have a history going back to ancient times. With the resurgence of trade in the early medieval period, the commercial treaty began its modern evolution. This early commercial treaty was usually bilateral, and its prime objective was to establish the legal rights of alien traders, the idea of “national treatment.” Removal of obstructions to trade was only a secondary motive.

1. National Treatment

The attainment of national treatment through treaty was strengthened in the 13th century. Venice, an Italian city-state that traded chiefly with Central and East Asia, exacted by treaty from the sultan of Ḩalab (Aleppo) the right to have its merchants equip their own quarter in his city and to have their own jurisdiction in civil and criminal cases. By the mid-19th century national treatment was so completely achieved that full protection of the rights and property of alien traders was the norm. Merchants traveled freely without passport or visa, and removing obstructions to trade became the main objective.

2. Protectionism

The Anglo-French Treaty of 1860—sometimes called the Cobden Treaty after the British economist and statesman Richard Cobden, who negotiated it—exemplified this change. This important treaty, meant to promulgate free trade by reducing and eliminating all tariffs between the two signatories, induced them to initiate a round of bilateral tariff reduction treaties with almost every other European nation. Almost all commercial treaties from then on included the most-favored-nation clause, which effected equal trading opportunity and opened the way for multilateral trade.

Ominous signs soon threatened this growing network of world trade. Imperialism, with its concomitant national economic rivalry and tariff warfare, became widespread. Germany reintroduced tariff protectionism in 1879, and the United States followed a high tariff policy in the post-Civil War period.

Although World War I (1914-1918) did damage to this trade network, it was more the state interference in economic affairs, the high taxation rates, and the principle of state nationalization of foreign enterprise that effectively disrupted world trade in the interwar period.

The cosmopolitan climate of the 19th century with its laissez-faire attitudes, that is, the noninterference by governments in economic matters, gave way to economic nationalism in the 20th century, especially after the depression of 1929 to 1933. The general principle of recognition of property rights went into decline.

3. Freer Trade

Hopeful omens, however, began to appear. In 1934 the United States passed the Reciprocal Trade Agreement, by which the president was empowered to lower import duties on a country's goods if that country reciprocated. The United States thereby moved from a protectionist policy to one of freer trade.

In 1947 the General Agreement on Tariffs and Trade (GATT), designed to reduce tariffs and eliminate discriminatory practices in international trade, was signed by 23 countries, including the United States. Eventually more than 100 countries signed GATT. In 1994 GATT signatories signed a new trade agreement that cut tariffs overall by one-third, protected intellectual property rights, and opened trade in investments and services.

This agreement also created the World Trade Organization to enforce its provisions starting in 1995. Regional groupings, established to eliminate tariff barriers among members and to promote mutual cooperation and trade, include the European Union (formerly called the European Community or the Common Market, established in 1957), the European Free Trade Association (EFTA, 1960), the Latin American Integration Association (LAIA, 1980), and the Central American Common Market (CACM, 1960).

The complex modern structure of the commercial treaty has been significant in stabilizing international trade and standardizing trade practices. An important commercial treaty, which also overcame ideological barriers, was signed by the United States and the Union of Soviet Socialist Republics in 1972; it also resolved long-standing differences in shipping and previously outstanding debts and provided a new framework for long-range trade.

Another significant accord, the North American Free Trade Agreement (NAFTA), which took effect in January 1994, outlined tariff cuts and the elimination of trade barriers between the United States, Canada, and Mexico.

Center of Diplomacy

Geneva (Switzerland) (French Genève; German Genf), city in western Switzerland, the capital of Geneva Canton. The city is located at the western extremity of Lake Geneva, where the Rhône River issues from the lake.

The Rhône divides Geneva into two almost equal parts. On the south, or left, bank stands the older part of the city, containing the financial and business districts and two old residential districts: Eaux Vives and Carouge, the latter a working-class neighborhood. Narrow, crooked streets penetrate the old quarter everywhere except along the river bank, which contains broad avenues and modern quays.

The Rhône is spanned by several bridges, one of which traverses a small island, Rousseau's Island. The northern, or right, bank is principally residential, containing the Quartier Saint-Gervais, in which large hotels are located; and the Les Délices district, containing the house in which the French writer and philosopher Voltaire lived from 1755 to 1758. The entire city is encompassed by boulevards laid out on the site of the ancient city walls.

Geneva contains many parks and squares, notably the Jardin Anglais and the Place Neuve on the left bank, and the Place des Alpes on the right bank.

The principal buildings in the old section include the Cathedral of Saint Peter, built in the 12th and 13th centuries;
The Florentine-style city hall, erected in the 16th century;
The Temple de l'Auditoire, where the Scottish religious reformer John Knox preached and the French theologian John Calvin taught;
The 18th-century house where the French philosopher Jean Jacques Rousseau was born;
The Rath Museum, containing an immense art collection;
The Museum of Natural History.

Educational institutions in the city include the University of Geneva (founded as the Collège de Genève by Calvin in 1559) and various industrial and technical schools, including the École d'Horlogerie (School of Watchmaking). Watchmaking and the manufacture of jewelry have contributed to making Geneva an important manufacturing center.

Other industries include enameling, the production of music boxes and scientific instruments, and diamond cutting. Geneva is also an important banking and financial center. Guest workers are an important part of the labor force, making up as much as 30 percent of the city's population.

Geneva became a world center in 1920 with the founding of the League of Nations, which established its headquarters in the city. Several important conferences took place in Geneva between the two world wars, notably the Naval Disarmament Conference in 1927 and the World Disarmament Conference of 1932.

The departure of the League of Nations in 1939 dealt a serious economic blow to Geneva, from which it slowly recovered during World War II (1939-1945). In 1947 Geneva was designated the European center for the United Nations, and in 1948 the International Labor Organization and the World Health Organization set up headquarters here, followed by other international agencies.

Geneva has remained a site for international diplomatic confrontations, notably the Asia Conference of 1954, concerning the disposition of Indochina, and the Geneva Summit Conference of 1955, at which the reunification of Germany was discussed. Beginning in 1962, several nations conducted disarmament negotiations in Geneva. Starting in 1993 the city was the site of the negotiations over the future of war-torn Bosnia and Herzegovina.

In 1995 the new World Trade Organization established headquarters in Geneva.

HISTORY

Geneva was the northernmost city of the Allobroges before the Roman conquest of Gaul. The city became part of the Roman Empire in 121 bc. It became an episcopal seat in the 4th century, was conquered by the Burgundians in the 5th century, and eventually came under Frankish rule. In the first half of the 11th century Geneva was incorporated into the Holy Roman Empire.

The ruling power of the city was conferred upon a prince-bishop, and the counts of Geneva were made feudal vassals. The Genevans, however, were unwilling to accept the bishop's authority and, desiring municipal independence, appealed for help in the early 14th century to Amadeus VI, count of Savoy. From that time on, Geneva became an object of struggle between its citizens, the counts of Savoy, the counts of Geneva, and the bishops of Geneva.

The Reformation finally brought the city its independence; in 1536, the Genevans declared themselves Protestant and proclaimed their city a republic. John Calvin was invited to take up residence in Geneva. The city gained a great deal of influence over Protestant Europe and became the center of education for Protestant youth from many countries. During the French Revolution (1789-1799), aristocratic and democratic factions contended for control of Geneva.

In 1798, however, France, then under the Directory, annexed Geneva and its surrounding territory. After the overthrow of Napoleon, Geneva recovered its independence, and in 1815 was admitted to the Swiss Confederation. The Congress of Vienna in 1815 increased the city's territory and guaranteed its neutrality. From 1841 to 1878 the history of the city was one of political strife, but democratic elements eventually triumphed.

The referendum was introduced in 1879, and in 1891 the initiative and recall were introduced. In 1907, by a referendum, the state and church were separated, and the theocracy, which had generally controlled Geneva, became a minor political factor. Population (2001 estimate) 175,800.

Foreign Trade

I FOREIGN TRADE

Foreign Trade, the exchange of goods and services between nations. Goods can be defined as finished products, as intermediate goods used in producing other goods, or as agricultural products and foodstuffs. International trade enables a nation to specialize in those goods it can produce most cheaply and efficiently. Trade also enables a country to consume more than it would be able to produce if it depended only on its own resources. Finally, trade enlarges the potential market for the goods of a particular economy. Trade has always been the major force behind the economic relations among nations.

Several trading communities have been established to promote trade among countries that have common economic and political interests or are located in a particular region. Within these trade groups, preferential tariffs are administered that favor member countries over nonmembers. Non-Communist countries encouraged trade-promoting programs to stimulate the redevelopment of economies ruined during World War II. The North American Free Trade Agreement (NAFTA), ratified by Mexico, the United States, and Canada in 1993, was designed to bring about a free market in everything produced and consumed in the three countries.

II EMERGENCE OF MODERN FOREIGN TRADE

Although foreign trade was an important part of ancient and medieval economies, it acquired new significance after about 1500. As empires and colonies were established by European countries, trade became an arm of governmental policy. The wealth of a country was measured in terms of the goods it possessed, particularly gold and precious metals. The objective of an empire was to acquire as much wealth as possible in return for as little expense as possible. This form of international trade, called mercantilism, was commonplace in the 16th and 17th centuries.

International trade began to assume its present form with the establishment of nation-states in the 17th and 18th centuries. Heads of state discovered that by promoting foreign trade they could mutually increase the wealth, and thus the power, of their nations. During this period new theories of economics, in particular of international trade, also emerged.

III ADVANTAGES OF TRADE

In 1776 the Scottish economist Adam Smith, in The Wealth of Nations, proposed that specialization in production leads to increased output. Smith believed that in order to meet a constantly growing demand for goods, a country's scarce resources must be allocated efficiently. According to Smith's theory, a country that trades internationally should specialize in producing only those goods in which it has an absolute advantage—that is, those goods it can produce more cheaply than can its trading partners. The country can then export a portion of those goods and, in turn, import goods that its trading partners produce more cheaply. Smith's work is the foundation of the classical school of economic thought.

Half a century later, the English economist David Ricardo modified this theory of international trade. Ricardo's theory, which is still accepted by most modern economists, stresses the principle of comparative advantage. Following this principle, a country can still gain from trading certain goods even though its trading partners can produce those goods more cheaply. The comparative advantage comes if each trading partner has a product that will bring a better price in another country than it will at home. If each country specializes in producing the goods in which it has a comparative advantage, more goods are produced, and the wealth of both the buying and the selling nations increases.

Besides this fundamental advantage, further economic benefits result when countries trade with one another. International trade leads to more efficient and increased world production, thus allowing countries (and individuals) to consume a larger and more diverse bundle of goods. A nation possessing limited natural resources is able to produce and consume more than it otherwise could. As noted earlier, the establishment of international trade expands the number of potential markets in which a country can sell its goods. The increased international demand for goods translates into greater production and more extensive use of raw materials and labor, which in turn leads to growth in domestic employment. Competition from international trade can also force domestic firms to become more efficient through modernization and innovation.

Within each economy, the importance of foreign trade varies. Some nations export only to expand their domestic market or to aid economically depressed sectors within the home economy. Other nations depend on trade for a large part of their national income and to supply goods for domestic consumption. In recent years foreign trade has also been viewed as a means to promote growth within a nation's economy. Developing countries and international organizations have increasingly emphasized such trade.

IV GOVERNMENT RESTRICTIONS

Because foreign trade is such an integral part of a nation's economy, governmental restrictions are sometimes necessary to protect what are regarded as national interests. Government action may occur in response to the trade policies of other countries, or it may be resorted to in order to protect specific industries. Since the beginnings of international trade, nations have striven to achieve and maintain a favorable balance of trade—that is, to export more than they import.

In a money economy, goods are not merely bartered for other goods. Instead, products are bought and sold in the international market with national currencies. In an effort to improve its balance of international payments (that is, to increase reserves of its own currency and reduce the amount held by foreigners), a country may attempt to limit imports. Such a policy aims to control the amount of currency that leaves the country.

A Import Quotas

One method of limiting imports is simply to close the ports of entry into a country. More commonly, maximum allowable import quantities may be set for specific products. Such quantity restrictions are known as quotas. These may also be used to limit the amount of foreign or domestic currency that is permitted to cross national borders. Quotas are imposed as the quickest means to stop or even reverse a negative trend in a country's balance of payments. They are also used as the most effective means of protecting domestic industry from foreign competition.

B Tariffs

Another common way of restricting imports is by imposing tariffs, or taxes on imported goods. A tariff, paid by the buyer of the imported product, makes the price higher for that item in the country that imported it. The higher price reduces consumer demand and thus effectively restricts the import. The taxes collected on the imported goods also increase revenues for the nation's government. Furthermore, tariffs serve as a subsidy to domestic producers of the items taxed because the higher price that results from a tariff encourages the competing domestic industry to expand production. See also Free Trade; Tariffs, United States.

C Nontariff Barriers to Trade

In recent years the use of nontariff barriers to trade has increased. Although these barriers are not necessarily administered by a government with the intention of regulating trade, they nevertheless have that result. Such nontariff barriers include government health and safety regulations, business codes of conduct, and domestic tax policies. Direct government support of various domestic industries is also viewed as a nontariff barrier to trade, because such support puts the aided industries at an unfair advantage among trading nations.

V 20TH-CENTURY TRENDS

In the first half of the 20th century, equal tariffs for similar goods was not the policy of all nations. Countries levied differential tariffs (charging lower tariffs to favored nations) and established other restrictive trading practices as weapons to fight unfriendly nations. Trade policy became the source of many international economic disputes, and trade was severely affected during times of war.

A Trade Negotiations

Attempts were first made in the 1930s to coordinate international trade policy. At first countries negotiated bilateral treaties. Later, following World War II, international organizations were established to promote trade by, for example, liberalizing tariff and nontariff trade barriers. The General Agreement on Tariffs and Trade, or GATT, signed by 23 non-Communist nations in 1947, was the first such agreement designed to remove or loosen barriers to free trade. GATT members held a number of specially organized rounds of negotiations that significantly reduced tariffs and other restrictions on world trade. After the round of negotiations that ended in 1994, the member nations of GATT signed an agreement that provided for establishment of the World Trade Organization (WTO). The WTO began operation in January 1995 and coexisted with GATT until December 1995, after which GATT ceased to exist. All of the 128 contracting parties to the 1994 GATT agreement eventually transferred membership to the WTO. See also Commercial Treaties.

B Trading Communities and Customs Unions

The largest trading community in the world began in Europe in 1948 with the founding of the customs union known as Benelux—Belgium, the Netherlands, and Luxembourg. In 1951 France, West Germany, and the Benelux countries formed the European Coal and Steel Community (ECSC). These nations established the European Economic Community (EEC), often called the Common Market, in 1957. The ECSC, EEC, and other entities merged in 1967 to form the European Community (EC), which was succeeded in 1993 by the European Union.


VI U.S. TRADE

In 2001, U.S. exports totaled about $666 billion, and U.S. imports, $1.18 trillion. Manufactured goods constituted 81.4 percent of all U.S. exports in 2001, and food products accounted for another 7.9 percent. Major exports also included chemicals, grains and grain products, soybeans, and coal. Of imports to the United States in 2001, 76.8 percent were manufactured goods and 10.9 percent were fuels. Among essential materials imported were rubber, tin, graphite, sugar, coffee, tea, and energy resources. In the 1960s, the United States experienced an erosion of its dominant position in world trade, and in most of the years after 1970, it reported a negative trade balance (more imports than exports). The U.S. share of world manufactured exports declined from 25.3 percent in 1960 to 14.0 percent in 1997. The American trade deficit with Japan was perceived to be a growing problem.

VII WORLD TRADE

In 1999 world trade (exports and imports) was approximately $11.4 trillion, almost triple the figure for 1980. Driven by inflation and higher prices for commodities such as oil, the value of world trade in U.S. dollars increased nearly tenfold between 1965 and 1985.

In the 20th century, trade has increased, becoming a more dominant segment of the world's economy. It is expected that the trend toward increasing interdependency among national economies will continue into the future.

Free Trade

I FREE TRADE

Free Trade, interchange of commodities across political boundaries without restrictions such as tariffs, quotas, or foreign exchange controls. This economic policy contrasts with protectionist policies that use trade restrictions to protect or stimulate domestic industries. See Tariff; Tariffs, United States.

II EARLY TRADE DOCTRINES

Foreign trade doctrines began to develop during the 1400s. One early form of economic policy, known as mercantilism, dominated Western Europe from about 1500 to about 1800. Supporters of this policy worked to promote national unity and to increase the strength of the nation-state. They considered wealth a necessary condition of power, and the accumulation of gold and silver specie, or coins, a necessary condition of wealth. Countries without gold or silver mines acquired specie by maintaining a surplus of exports over imports through strict governmental control of foreign trade.

A reaction against such control occurred in France in the 1700s. This led to the formulation of the first theory of free trade by a group of economic philosophers known as the physiocrats, who were followers of the French economist François Quesnay. The physiocrats maintained that the free movement of goods was in accordance with the principles of natural liberty. Although their ideas had little effect in France, they influenced the British economist Adam Smith, whose free trade theories contributed to the later development of trade policy in Britain.

Smith refuted the protectionist conclusions of mercantilist thought. He pointed out that wealth consisted not in specie itself but in the material that specie could purchase. Governmental regulation of trade actually reduced the wealth of nations, because it prevented them from purchasing the maximum amount of commodities at the lowest possible price. With free trade, each nation could increase its wealth by exporting the goods it produced most cheaply and importing goods that were produced cheaper elsewhere.

According to Smith, each country would specialize in the production and export of goods in which it had an absolute advantage—that is, it could produce the goods more cheaply than any of its trading partners. Another British economist, David Ricardo, extended that analysis early in the 19th century to encompass the more general case of comparative advantage. Ricardo noted that some nations lack an absolute advantage in the production of any commodity.

However, even these nations could gain from free trade if they concentrated on producing commodities in which they had the smallest disadvantage. This enables the nation to trade goods that are easiest to produce for goods that are more difficult to produce. When nations practice the principle of comparative advantage, more goods are produced between the trading countries, and the wealth of both countries increases. The principle of comparative advantage forms the theoretical basis of the argument for free trade.

Ricardo assumed that all nations would share in the gains from free trade. The British philosopher and economist John Stuart Mill later demonstrated that such gains depend on the strength of reciprocal demand for imports and exports. The stronger the demand for the exports of a country relative to its demand for imports, the greater its gain from free trade. The gain would be reflected in an improvement in the international terms of trade for the country, as expressed by the ratio of its export prices to its import prices.

III MODERN TRADE THEORY

The classical theory of trade developed by Smith, Ricardo, and Mill was concerned primarily with the analysis of the gains from trade. Modern trade theory, by contrast, takes the principle of comparative advantage for granted. It is mainly concerned with the analysis of the basis for trade and with accounting for differences in comparative advantage.

Classical theorists assumed that differences in comparative advantage resulted from differences in the productivity of resources, reflecting the unequal distribution of technologies and labor skills among nations. A more complete explanation was offered by several 20th-century economists, who noted that differences in the prices of final goods tend to reflect differences in the prices of resources used to produce the goods, and that these differences reflect differences in the availability of the resources. Countries specialize in the production and export of goods requiring relatively large amounts of those resources that they possess in abundance, and they import goods requiring relatively large amounts of resources that are scarce within their borders.

IV ARGUMENTS FOR PROTECTION

Despite the arguments of classical trade theory, few countries ever adopted a thoroughgoing policy of free trade. The major exception was Britain, which, from the 1840s until the 1930s, levied no import duties of any kind. The historical prevalence of protectionist policies reflects in part the strong influence of industries fearful of foreign competition, and in part the strength of various theoretical arguments for protection. Such arguments include the infant-industry argument, the national defense argument, the counter-dumping argument, and arguments focused on protecting domestic employment and income. Under appropriate circumstances all of these arguments have theoretical validity as well as limitations.

One of the oldest arguments for protection is the so-called infant-industry argument. According to this theory, when foreign competition is reduced or eliminated by import barriers, domestic industries can develop rapidly. After their development is complete, they should theoretically be able to hold their own in competition with industries of other nations, and protection should no longer be required. In practice, however, protection frequently cannot be removed, because the domestic industries never develop sufficient competitive strength. The limitation of the infant-industry argument is its inability to identify those industries that are capable of growing to genuine maturity.

The national defense argument for protection seeks to avoid dependence on foreign sources for supplies of essential materials or finished products that might be denied in time of war. The limitation of this argument is that identification of those industries indispensable for national defense is difficult.

A third instance in which protection is advocated is to counter dumping from abroad. Dumping occurs when products are made available as imports at prices lower than the prices prevailing in the exporting country. Protection may be justified in these circumstances, but only if the clear intention of foreign suppliers is to drive domestic suppliers out of business.

During periods of high unemployment, protection is often urged as a means of increasing employment. With imports reduced, demand for domestic substitutes will be stimulated, expanding production at home. Economists call this a “beggar-my-neighbor” policy: The improvement of employment at home is achieved entirely at the expense of employment elsewhere. The limitation of such a practice is that it invites retaliation from other nations suffering from similar problems of high unemployment.

Protection can be used to redistribute income either within nations or between nations. For example, if a nation finds that the demand for its exports is relatively strong, it can gain income at the expense of other countries by imposing tariffs or other import barriers. Foreigners will then find it more difficult to earn the income to pay for the exports they desire. Consequently, they will be forced to reduce their prices, thus improving the terms of trade for the protectionist nation. Like the employment argument, this method invites retaliation from abroad.

V RECENT DEVELOPMENTS

Since World War II ended in 1945 the leading trading nations have generally made a concerted effort to promote freer trade and remove protectionist barriers. In 1948 the General Agreement on Tariffs and Trade (GATT) went into effect. GATT was a treaty and international trade organization that worked to reduce or eliminate tariffs and other barriers to trade. GATT was originally signed by 23 nations, including the United States. A succession of trade “rounds” or negotiations significantly reduced tariffs on a large number of manufactured goods. In 1994 Canada, Mexico, and the United States took a major step toward removing trade barriers by ratifying the North American Free Trade Agreement (NAFTA).

Then in 1995 GATT was replaced by the World Trade Organization (WTO). By 2001, 142 nations were members of the WTO. The trade round that created the WTO further liberalized trade in manufactured goods and expanded the scope of the international trade agreement. The WTO began to reduce trade barriers and limit subsidies for agricultural products. It phased out protectionist measures for textiles and apparel, and it imposed limits on the ability of participating nations to enact or maintain nontariff trade barriers such as regulatory standards that discriminate against imports. The WTO also established a more effective system for adjudicating trade disputes.

Despite the apparent role of free trade in promoting strong economic growth during the 1990s, both NAFTA and the WTO proved highly controversial. Large and often violent demonstrations at a WTO meeting in Seattle, Washington, in 1999 revealed a substantial public backlash against trade liberalization in the United States. Many critics argued that free trade had led to reduced wages, job displacement, and harm to the environment. Many environmental organizations, for example, objected that domestic regulations to protect the environment could be overturned under the WTO if they were shown to restrict imports.

International Political Economy

I INTERNATIONAL POLITICAL ECONOMY

International Political Economy, field of study that deals with the interaction of politics and economics among the world’s nations. The most important of these interactions concerns foreign trade. Students of international political economy also examine the politics of international financial relations, regional political and economic cooperation, international environmental management, international investment patterns of multinational corporations (MNCs), foreign aid, and relations between rich and poor regions of the world.

Military and defense issues dominated the study of international relations after World War II ended in 1945. In the decades that followed, attention focused on the Cold War conflict between the United States and the Soviet Union. However, since the end of the Cold War in 1991, policy makers and scholars have directed new attention to the importance of the international political economy in the study of international relations.

Students of international political economy examine how government policies affect economic trends and why nations adopt specific economic policies. They also seek to understand the foundations of global or regional economic cooperation in a world of growing, independent national governments.

II TRENDS IN INTERNATIONAL POLITICAL ECONOMY

Since the end of World War II, the pace of international economic transactions has risen steadily. At the same time, different regions of the world have experienced dramatically uneven patterns of economic growth. New international institutions have emerged to coordinate policy efforts and resolve international disputes that have accompanied these transformations in the global economy.

A International Trade

In the 1990s, international trade has grown to nearly 20 percent of the world’s total production of goods and services—around $4 trillion a year. This volume of trade is almost five times larger than the world’s military spending.

New institutions have developed to promote and manage the world’s trade. From 1948 to 1995, nations negotiated a series of treaties through the General Agreement on Tariffs and Trade (GATT), which gradually lowered tariffs for most manufactured goods.

In the 1990s the GATT transformed itself into the World Trade Organization (WTO), with more powers of enforcement and a broader mandate to promote trade. Overall, most political activity related to trade is concentrated in the industrialized countries of North America, Western Europe, and East Asia. Together, these countries account for 75 percent of all international trade.

In the 1990s, however, students of international political economy have also examined trade issues in the formerly Communist “transition economies” of Russia and Eastern Europe (see Communism). Nations in this region face formidable challenges as they try to join the capitalist world economy (see Capitalism).

B International Currency

Explosive growth in the exchange of foreign currencies in international markets has also transformed the global political economy (see foreign exchange). Advanced telecommunication technologies now link these markets in major financial trading centers, such as Tokyo, Hong Kong, Zürich (Switzerland), and New York City. By the mid-1990s, well over $1 trillion in foreign exchange transactions occurred daily. This huge sum of privately controlled money exceeds annual global expenditures on military forces. It also dwarfs the amounts of money available to national governments, which have lost some of their former ability to influence the international purchasing power of a given currency in foreign exchange markets.

C International Integration

The growth of international integration has been equally dramatic, with the most important developments occurring in Europe. The European Union (EU), formed in the 1950s, started with six countries coordinating coal and steel policies, then lowering tariffs to allow free trade among themselves. By the mid-1990s the EU had 15 member nations, with a waiting list of would-be members. The organization closely coordinates virtually all aspects of the economic policies of member nations, from trade and immigration to labor regulations and agricultural policies.

In 1999 a group of EU member nations adopted the euro, a single currency intended to replace the national currencies in most European countries. Outside of Europe regional integration has proceeded more slowly, with the implementation of the North American Free Trade Agreement (NAFTA) in 1994 and less influential agreements in other regions of the world.

D Multinational Corporations

The nature of international business has shifted dramatically as well since World War II. In the past, multinational corporations based their operations in one country, with their activities in other countries limited primarily to the sale of products. Today, the MNCs manufacture products in locations around the world. This allows corporations to take advantage of the various conditions in each country, such as cheap labor, skilled workers, natural resources, and favorable trade or tax regulations.

MNCs have also created global markets for their products, a trend that has led to the standardization of brand name products worldwide. For example, McDonald’s hamburgers are sold in dozens of countries, and every half-second a Barbie doll is sold somewhere in the world. The growing power of MNCs, however, raises difficult issues for national governments, which must weigh the need for foreign trade and investment against the desire to preserve national sovereignty and culture.

E Growth of Asian Economies

As the world economy has grown in the 1980s and 1990s, the center of economic activity has shifted from Europe and North America to the Asia-Pacific region. In East Asia, South Korea, Taiwan, and Singapore have registered dramatic economic growth and prosperity by using strategies based on foreign trade and export growth. China achieved 10 percent average annual growth in the late 1980s and early 1990s using a similar model of economic development.

Other East and Southeast Asian countries seek to emulate these successes. Meanwhile, most of Africa and several smaller areas have been left behind, with low and falling standards of living. Global economic change has also transformed the balance of political power. For example, U.S. policy makers pay more attention to Japan and China and less to Europe than they did several decades ago.

III THE STUDY OF INTERNATIONAL POLITICAL ECONOMY

The study of international political economy developed rapidly as an academic discipline in the 1980s and 1990s. Scholars in this subject area generally adopt the theoretical perspectives of either liberalism or mercantilism in their efforts to understand the operations of the global economy.

A Liberalism and Mercantilism

Advocates of liberal policies in international economics support free economic markets and trade and oppose active legislative or regulatory intervention of governments. A commitment to free trade is the foundation of comparative advantage, an idea developed by British economists Adam Smith and David Ricardo in the late 18th and early 19th centuries. According to the idea of comparative advantage, a country can produce and export certain goods and services more efficiently than another country because it has a greater abundance of natural resources and labor skills needed to produce these goods and services.

Nations should specialize in producing goods and services in which they have a comparative advantage, using the revenues gained to import other needed goods and services. Liberals argue that such practices maximize the creation of global wealth, increasing the fortunes of each individual country, although not necessarily equally.

Mercantilist policies, by contrast, favor greater political control over markets and exchanges. In particular, mercantilists advocate the use of protectionistpolicies—tariffs, subsidies, and other measures to protect domestic industries against foreign competitors. Mercantilists regard policies involving trade, money, and business as a basis to strengthen the power position of a nation relative to others.

In the 16th and 17th centuries, for instance, monarchies controlled national economies in Europe. At that time, government officials viewed a trade surplus (when export revenues exceed import costs) as a way to build a “war chest” of gold and silver that would be available for military needs in the event of war. Mercantilists concern themselves less than liberals with maximizing global wealth. They focus more upon the political and economic strength of their nations in relation to rival countries.

Liberals tolerate temporary protection of domestic industry in selective cases, as when an automotive or steel industry in a country needs time to establish itself before competing in global markets. Policies may also focus on protecting industries considered essential to national security. In the 1980s, for example, the U.S. government developed policies to protect the militarily strategic semiconductor industry from Japanese competitors. Specific industry and labor groups threatened by foreign competition often lobby government officials to protect the markets for their products by raising tariffs or other barriers to trade.

B Marxism

The ideas of 19th-century German philosopher Karl Marx offer a third political approach toward understanding economic behavior and policies. Marxism focuses on the inequality of relationships between economic classes and the vulnerability of the poorest economic groups to exploitation from wealthier and more powerful groups. Marxists view international economic relations as an extension of the class struggle between the rich and poor.

The Marxist approach has declined in prominence since the late 1980s, especially with the collapse of socialism in the former Soviet bloc, and the movement towards capitalism in China. However, Marxist theories still receive some attention from scholars, especially in the study of relations between the world’s rich and poor nations.

IV THE PROBLEM OF COLLECTIVE GOODS

Scholars who study how nations achieve cooperation despite the lack of a centralized world government to enforce rules pay special attention to the collective goods problem. A collective good is any benefit enjoyed by all members of a group regardless of their individual contribution. Each member faces the temptation to contribute less than other members towards maintaining the collective good. However, if too many members fail to meet their responsibilities, the good will not exist for anyone.

For example, the stocks of fish in the world’s oceans are a collective good. Each country benefits by catching more fish, yet if all countries maximize their catch the fish stocks decline, as happened around 1990 when global fish catches dropped sharply. In domestic political arenas, governments solve the collective goods problem by enforcing laws, such as making people pay their taxes or repair cars that pollute excessively. Collective goods problems present difficult dilemmas because no governmental authority exists to enforce agreements internationally.

Collective goods problems affect almost every issue studied by students of international political economy. In trade relations, each nation benefits from the ability to export its products to other national markets, but may gain by raising its own tariffs to restrict imports from other nations. In international currency exchange, each nation benefits from stable exchange rates that facilitate trade and business, but may seek to unilaterally devalue its own currency to rectify a trade deficit. In global environmental management, each nation benefits from sustainable fisheries, stable climate, and an intact ozone layer, but would rather have other nations bear the costs of maintaining these benefits.

Solutions to collective goods problems in the international political economy generally involve international agreements and institutions that coordinate the actions of various nations. Neoliberal institutionalist scholars generally find such solutions workable, though imperfect. However, realist scholars are far more pessimistic about solving collective goods problems, because they see nations as self-interested and mainly motivated by the desire to maximize power relative to other nations.

V FUTURE DIRECTIONS

In the 1990s, liberalism has generally prevailed over mercantilism and Marxism in academic and policy debates regarding the international political economy. The global expansion in international trade, business, and currency exchange has largely sustained the liberal argument about the benefits of free trade and open markets. Despite the collective goods problems and other obstacles to international cooperation, national governments and international organizations alike have found ways to make cooperation effective.

The international political economy faces a number of challenges in the coming decades. While regional integration among national economies has advanced, the potential has emerged for the division of the world into three rival trading blocs: Europe, the Americas, and Asia. While separate nations in Western Europe have merged economically through the EU, the economies of the former Soviet Union and Yugoslavia have split into separate pieces, at great cost.

The increased economic interdependence of rich and poor nations has resulted in a global backlash, leading to increased isolationism in the United States, violence against immigrants in Germany, and anti-Western Islamic movements in the Middle East. The deep economic depression in the former Soviet Union and economic and social deterioration in Africa also threaten the stability of an interdependent global economy.

Tariff

The trend to increase tariffs continued in the 1800s and early 1900s and was particularly strong during the early years of the Great Depression (1930s). During the depression, however, some countries made a concerted effort to reduce tariff barriers.

After 1934 the United States negotiated trade agreements that reduced some duties and provided for most-favored-nation status. For the history of tariffs in the United States, (see Tariff, United States).

After World War II tariff barriers continued to decrease with the establishment of the General Agreement on Tariffs and Trade (GATT) and the formation of regional customs unions, such as Benelux and the European Community (now called the European Union). These groups lowered tariffs among themselves and maintained a common tariff for nonmembers.

World trade promotion through lower international tariffs and the removal of other obstacles continues to be fostered by the World Trade Organization (WTO), which took over GATT's activities in 1995. Most trading nations are members of WTO.