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The concept of free trade is rooted in the eighteenth-century ant mercantilist movement seen in Europe and prerevolutionary America. Mercantilism is an economic theory founded on a belief that the global volume of international trade is fixed or unchangeable and that the prosperity of a nation depends on its supply of capital, particularly gold and silver. According to mercantilists, governments should maximize their capital with protectionist policies, encouraging exports and discouraging imports through tariffs and subsidies, resulting in a positive balance of trade. Conversely, the emerging free trade concepts in the 1700s among intellectuals in France, Great Britain, and colonial America were based on a belief in laissez-faire government and international commerce. Focusing on agriculture as the only source of true wealth for nations, a group of French economists known as physiocrats argued a nation’s net product could be increased by reducing barriers to trade and regulations impeding the growth of this sector.

English economists such as David Hume and Adam Smith, “helped transform anti-mercantilism into the positive cosmopolitical vision of free trade benefiting humanity” (Eckes, Opening America’s Market: U.S. Foreign Trade Policy Since 1776, 1995, 4). They argued mercantilists failed to understand the benefits of free trade between nations and the notion of comparative advantage, which was fully developed later in the 1800s by David Ricardo, an English political economist. The theory of comparative advantage argues, for example, that if France were a more efficient producer of both cloth and wine than Britain, but Britain could produce cloth with fewer resources than it could produce wine, both countries could financially benefit by specializing, Britain in cloth and France in wine, and then trading. Trade, in other words, was no longer viewed as a zero-sum game but as a means of enhancing the wealth of all nations involved.

History Of Free Trade

In prerevolutionary America, one could find ardent supporters of free trade in Benjamin Franklin, Thomas Paine, and Thomas Jefferson. While Paine and Jefferson argued for “freedom to trade,” Franklin thought trade should be free between all nations of the world and “no nation was ever ruined by trade, even, seemingly the most disadvantageous” (Eckes 1995, 2). Early taxes imposed by the British parliament on the British colonies in North America came disguised in the form of tariffs on specific imports. The Townshend Acts of 1767 placed duties on goods that the colonists did not produce in great quantities, such as paper, glass, and tea. While some colonists avoided the tariffs by boycotting the taxed products, others staged public protests, leading to the Boston Massacre of 1770 and the Boston Tea Party in 1773. After the Declaration of Independence in 1776, the Continental Congress, seeking freedom to trade on equal terms with other nations, drafted a treaty calling for reciprocal national treatment, which is treating foreign products the same as domestic ones in terms of taxation and regulation, and unconditional most favored nation treatment, which is granting all countries equal trade privileges. Although these principles did not become standard practices in U.S. treaties or under international obligations until the twentieth century, they established the groundwork for fair international treatment in trade.

An overwhelming need for revenue, however, seemed to override many nations’ support for actual free trade during the next century. In the United States, the first tariff bill of 1789 included a mix of ad valorem, which is a percentage of the value of a good, with fixed per-unit taxes designed primarily to service the war debt and finance government expenditures. However, political controversy over which goods to tax and whether high or low tariffs were optimal for preventing economic depressions or recessions raged on through the 1800s and into the 1900s in the United States and the world.

The 1930 Smoot-Hawley Bill, which passed the highest tariff rates in U.S. history, is believed to be at least partially to blame for the severity of the worldwide economic depression that followed shortly thereafter. The U.S. Congress reacted by passing the 1934 Reciprocal Trade Agreements Act, delegating greater powers to the executive branch to lower tariffs through bilateral reciprocal trade negotiations. The 1947 General Agreement on Trade and Tariffs (GATT), a multilateral treaty signed by twenty-three countries, including many of the Allied states, was designed to spur international trade by reducing tariff barriers. Many of the GATT’s provisions were derived from bilateral treaties negotiated by the United States under the Reciprocal Trade Agreements Act. The GATT was supposed to operate under the charter of the International Trade Organization, but failure of the U.S. Senate to ratify the International Trade Organization on the grounds it would cede too much sovereignty to an international body left the GATT as the only legal framework for international trade negotiations. The GATT contract embodied legal rights and obligations for member countries, including articles requiring most favored nations and national treatment, which were supposed to enable smaller, less developed countries to have equal trading rights and stature when engaging with large countries. In 1995, the GATT agreement evolved into the current 153-member World Trade Organization (WTO).

The WTO And Regional Trade Agreements

Although subsequent international trade agreements negotiated under the GATT/WTO put the world on a path to freer trade by substantially lowering tariff rates, it by no means rid countries of the political need for protectionism. Provisions in the GATT/WTO, such as the escape clause, which allowed for exemptions from principles of free trade, as well as other nontariff barriers not restricted under the agreement, replaced tariffs as a means of protecting industries worldwide. For example, protection through the implementation of WTO-sanctioned antidumping statutes has grown substantially around the world. Antidumping refers to a legal statute which allows for a remedy, namely, an import duty, to offset the effects of dumped imports, where dumping is defined as selling goods below cost of production or home market price. As of 1984 no developing or middle-income countries were using antidumping statutes; however, by the end of the 1990s over forty developing countries had enacted new legislation to administer such protection. By 2001, it was estimated more antidumping duties were levied within one year worldwide than were levied from 1947 through 1970.

In addition to the creation of the WTO, and perhaps to bypass pressures of a growing global economy, free trade agreements have proliferated around the world. While hundreds of these agreements are bilateral in nature, numerous multilateral free trade agreements, such as the North American Free Trade Agreement, the Economic Community of West African States, the European Economic Area, the Association of Southeast Asian Nations, and the South Asian Association for Regional Cooperation, promote freer trade among member countries, lowering barriers regionally, if not globally. While some argue these bilateral and multilateral agreements have created a chaotic and discriminatory system undermining free trade and the principles on which GATT and the WTO were originally founded, the proliferation of such agreements is expected to continue.

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