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Synthesis/Regeneration 6   (Spring 1993)

A Brief History of GATT and NAFTA

by Mariama W. Williams, Women's Alternative Economic Network

The US is currently deemphasizing the GATT in order to pursue its own international competitiveness on its own terms. Just as the US swayed between benign neglect of the U.N. system and full participation when it suited it, so too will it use the GATT. The US will rely on NAFTA to regulate trade and the flow of foreign investment closer to home. But it will continue to rely heavily on the GATT, the International Monetary Fund and the World Bank to keep non-NAFTA member countries in line.

Free trade and the Origins of GATT

The importance of international trade for the well being of a country has long been recognized. What has been in contention is the degree of openness of the economy to the penetration of foreign goods and services. In the 1700's it was widely held that trade was a dog-eat-dog world. The conventional wisdom of the time (Mercantilism) argued that a country could only gain at the expense of its rival—that a country grew rich by the amount of gold that it amassed through the sale of home-produced goods to foreigners, whilst constraining the amount of foreign goods sold on the home market. Protection of the domestic market was held to be sacrosanct.

In the 1800's the mercantilist view was significantly challenged by theorists such as Adam Smith and David Ricardo. They argued that international trade could be a win-win proposition. This was possible if two conditions were in place: (1) each country specialized in producing and selling the goods that it could produce the most efficiently relative to another country (the law of comparative advantage), a sort of international division of labor; and (2) free and unregulated flow of goods among and between countries, a sort of international laissez faire. Once these two conditions were met, free traders argued that there would be mutual gains for all, a result of increased productivity (due to specialization) and an increased standard of living. Though David Ricardo developed the law of comparative advantage, it was Smith who first argued the virtue of specialization. In Smith's words: "...the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker..."

Though the "(b)elief in the economic and moral rightness of Free Trade became an national dogma in Britain in 1846," it took a while for the free trade fever to hit the Americas. The US governing class held long and hard to protectionism. This became even more pronounced after Alexander Hamilton in his Report on the Manufacturers called for protection for the nation's infant industries. This trend culminated in the infamous Smoot-Hawley Act of 1930 which raised US tariff rates by almost 50% between 1929 and 1932. The free trade-protectionist debate in the US had many twists and turns: at one point the South was pro-free trade (seeking lower duties on manufactured imports) while the North adopted a protectionist posture. At one time the Democrats were the free traders, with the Republicans the antagonists. The recent acceptance of free trade as sacrosanct is the evolution of a long and often acrimonious debate in both the US and Great Britain.

It took the ravages of the great depression of the 1930's to bring convergence on trade issues on both sides of the Atlantic. The macroeconomic failures which created high unemployment and depression across the globe in the 1930's caused nation after nation to attempt to export their unemployment problems by exporting more abroad while restricting the inflow of foreign goods. Country after country adopted what was termed beggar thy neighbor policies—raising tariff rates to draconian levels. Countries retaliated against each other and a trade war ensued leading to the total collapse of international trade.

The debacle of the 1930's led to a reassessment, realignment and restructuring of the world economy. The result of the reassessment was that tariff wars were destructive to all parties, it should not be allowed to happen again and a more coherent framework was needed. The realignment occurred between Great Britain and the US: first, the formal recognition that the US was now in charge and second, they would reduce some barriers to trade. The restructuring of the world economy would occur along lines dictated by the law of comparative advantage and free trade.

Thus the Post World War II New World Order was ushered in. The Bretton Woods Conference created the International Monetary Fund (to oversee the world's monetary and exchange rate systems) and the World Bank for economic restructuring and development in western Europe. The Bank would distribute the world's supply of capital, primarily Marshall Plan funds. The General Agreement on Trade and Tariff was created at the first session of the Preparatory Committee of UN Conference on Trade and Employment in 1946. The GATT's initial purpose was to negotiate tariff concessions among members and to establish a code of conduct and procedures for the resolution of trade disputes by negotiation. Successive negotiations (called rounds) have also focussed on the code of conduct for nontariff barriers. The GATT was founded on the principles of nondiscrimination and multilateralism in international trade. Nondiscrimination is expressed via unconditional Most Favored Nation status for all contracting parties. By this convention "if the tariff on imports from one country is decreased, the tariff on all imports of the same goods from other GATT members must be reduced."

The debacle of the 1930's led to a reassessment, realignment and restructuring of the world economy. The result of the reassessment was that tariff wars were destructive to all parties, it should not be allowed to happen again and a more coherent framework was needed.

Conventional wisdom attributes much of the prosperity that occurred in the global economy since the 1940's to the existence of the GATT. In particular, the GATT is lauded for the dramatic increase in world trade and (until the mid 1980's) the absence of any serious trade friction. But today the world economy is in turmoil. Like the period of the 1930's, macroeconomic failures across countries have created staggering levels of unemployment in rich and poor countries alike. The case for free trade is in the gravest doubt for the first time since it gained ascendance in Britain in 1846. Thus the fate of GATT is also in doubt. The US, once the defender of multilateralism and free trade, is now seeking regional solution to its economic woes with its NAFTA initiative. What went wrong?

Free Trade, Managed trade, and NAFTA

There are a number of factors that led up to NAFTA. By far the most important is the relative decline in US international competitiveness. Pivotal to US decline is the rise of Japan as serious rival in the US domestic market as well as the global market. By the 1970s it was clear that the international trade system the US had constructed was no longer working solely in the interest of American corporations. Multilateralism, which in the 1950s and 60s favored the expansion of US corporations across the globe, also favored their foreign rivals. Free trade meant that the US now faced competition from the revitalized economies of Western Europe and Japan. Thus the US found itself losing out on its traditional bedrock industries: cars, consumer electronics, and textiles and apparel. But it retains an edge in non-traditional areas: high technology, pharmaceutical and communication systems.

The US sought to ensure its edge by promoting the expansion of the GATT rules into non-traditional areas. It also sought to stem the hemorrhage of its traditional areas of comparative advantage by pressing the issue of the "level playing field", "fairness" and reciprocity through managed trade, and ending European subsidies on agriculture. It was also dissatisfied with the GATT's dispute resolutions process. The US encountered stiff resistance from the members of GATT. Most developing countries and quite a number of developed countries balked and the process stalled. The US went unilateral--falling back on Section 301 of the 1974 Trade Act which allowed for strong more effective (punitive) measures on goods entering the US. It also went bilateral (with Israel, then Canada).

At the same time, the countries of Latin America were bogged down in quagmire of externally owed debts, the management of which was slowly and effectively strangulating their economies. From the vantage point of the US this presented two new and interesting twists. First, most of the debts were owed to American banks. A default could bring the banking system down. The problem required the infusion of new money . Second, IMF management of the debt crisis meant that the debtor countries were susceptible to prescriptions to restructure their economies along lines that were acceptable to the US economic and financial interests. These included elimination of fetters on the free market, privatizing areas of the economy which were previously under public control and eliminating restrictions on foreign investment.

From the vantage point of many Latin American nations, the debt crisis meant that they were at the mercy of the international money and capital markets. Their plight was exacerbated by the fall of Communism in Eastern Europe which created an additional drain on scarce world capital. Suitably chastened by events external and internal to their countries, many opted for economic and political liberalization. Mexico took the most aggressive stance. It joined GATT in 1986, and set in motion a series of tariff reduction and other economic liberalization measures. It also indicated that it would be interested in securing a "Canadian" deal with the US.

Against this backdrop, certain interests in the US, faced with problems of negotiating the Uruguay round of GATT, unrelenting competition from Japan and the four Asian tigers, and the consolidation of the European single market, came to the conclusion that it was time to "exploit for ourselves our own market." This meant looking around its own back yard—Canada, Mexico and increasingly towards Central and Latin America.

Mariama Williams writes and conducts workshops for the Women's Alternative Economic Network.

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