The two immediate economic challenges confronting the United States in the wake of the recent recession are the need to accelerate economic growth and create American jobs. Toward these ends, the U.S. trade agenda must be resurrected.  Freer and more open trade is one of the most powerful tools at our disposal to promote growth and job creation, and the multinational framework known as the World Trade Organization (WTO) is the essential mechanism for maintaining an open global trading system governed by the rule of law.

This is the second in a five-part ForumBlog series which presents the compelling historical case for free trade.

The Philosophical Foundations of Trade

Sixty-three years ago, in April of 1947, at the Palais des Nations in Geneva, Switzerland, representatives from 23 nations opened a conference that attracted little attention at the time, but had far-reaching consequences for the world economy.  They met to negotiate tariff reductions and finalize the text of a General Agreement on Tariffs and Trade (GATT).

The participants sought to create an open world trading system, one in which trade would flow relatively freely between countries, with the understanding that new trade barriers would not be erected.  In the 60 years since, world trade and prosperity have flourished to a degree well beyond the hopes of the creators of the GATT.

The GATT was created as part of the world’s response to the devastation of World War II and the policy failures and Great Depression that led in part to that historic calamity.  The organizing principal was simple yet inspired – to promote global stability and security by expanding economic opportunity and raising living standards around the world.

The connection between trade and economic growth had been made 170 years earlier by Adam Smith in his classic work The Wealth of Nations.  Trade, Smith explained, increases the size of markets, thereby promoting competition and all the associated benefits, such as greater efficiency, lower prices, and innovation.  Trade also provides access to the resources, goods, and services that nations lack or can only make with great difficulty.  Trade, therefore, promotes peace by substituting internal development for territorial enlargement through conquest.

To these seminal observations, British economist David Ricardo added his notion of comparative advantage, whereby countries with very different capacities and levels of productivity can still trade to mutual benefit.

The great significance of the GATT was that it marked the first time the world had enshrined these principals in a multinational framework aimed at promoting global economic growth and development by reducing barriers to trade.

Tomorrow’s blog entry will examine the historical record of free trade and its contributions to the global economy.