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Summary of dominant issues in the international economic system and free trade
By: Saeed Kakeyi
September 15, 2007

Introduction
Throughout modern history, trade became the heart of economic growth. In the nineteenth
century, countries gradually dropped their restrictions on trade, and in early twentieth century the
Gold Standard was used worldwide to measure the value of goods and currencies, providing a
universal currency (Spero and Hart: 2003, 12). While the Colonial Britain was the workshop of
the old world order, the United States (U.S.) was gaining dominant power.
During the Great Depression of the 1930s, which led to a worldwide slump in economic
growth, the world relapsed to protectionism. Trade fell even faster, causing more unemployment
and prolonging the downturn. The U.S., which suffered less from the crippling effects of the
World War I, was politically and economically dominant and was under great pressure to open
up its markets to other countries and, with it, face the challenges of creating a stable international
economic system and initiating free trade.
This essay will cover the dominant issues facing the international economic system and
free trade which was introduced in its modern form after the World War II.

Bertton Woods’ System

The Bertton Woods system, created in July 1944 by representatives of 44 countries, set the stage
for freer trade by replacing the inadequate economic governance of market forces. In order to
prevent the economic and political collapse and stop any destructive world conflicts in the future,
the Bretton Woods agreement came up with a brand new “publicly managed international
monetary order” with two organizations as its tools to foster free trade: the International
Monetary Fund (IMF) and the World Bank (2003, 13-14).
The battled world was in a desperate need for vital income. In particular, most of Europe
and Japan was struggling to feed its people. Thus, free trade was the only option to revive the
world economy. Accordingly, 23 countries got together in Havana and in 1948 signed an
agreement to reduce customs’ tariffs: the General Agreement on Tariffs and Trade (GATT) was
formed. This Geneva-based public organization helped promoting free trade by persuading
countries to abolish import tariffs and other barriers to open markets. Meanwhile, the U.S.
encouraged an outflow of its dollars through U.S. aid programs and the Marshal Plan (2003, 16).
The dramatic drop in tariffs on manufactured goods and a rapid increase in dollar
liquidity by the U.S. military expenditure in Europe and elsewhere, contributed to the creation of
economic prosperity in Germany and Japan despite these two countries’ “trade protection and
discrimination against the (U.S.) dollar” (2003, 17).
However, fearing that the economic weaknesses of liberal European nations would make
them vulnerable to communism threats, the U.S. continued “not only to rebuild Western
economies and to ensure their continuing vitality but also to provide for their political and
military security” (2003, 3). Therefore, economic cooperation between the Western developed
countries became essential and was subordinated to their common security interests. Thus, the
developed market economies agreed on the creation and the management of a liberal economic
system with which barriers to free trade and capital flows were further reduced, and the U.S. led
the system throughout the Bretton Woods period. For the U.S. as a superpower, this leadership
meant to “act as the world’s banker, provided the major initiatives in international trade
negotiations, and dominated international investment” (2003, 4).
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Interdependence System
By the 1970s, the difficulties of managing “a stable world economy was seen as a management
problem for major powers, and particularly for the United State” (2003, 10). Accordingly, this
dominant issue was dealt with by forming a new international economic system known as the
Interdependence System which replaced the troubled Bretton Woods system.
The interdependence system, however, had its own issues and challenges with the
“underlying liberal consensus on which the system was based” (2003, 5). One challenge was
presented as how to limit economic reactions as well as interdependence. In order words, how to
handle an open international system that does not maximize the economic benefits of a nation
and lead to undermining its sovereignty. The reaction to this argument resulted in the creation of
the European Economic Community (EEC) in 1957 which aimed at having a collective regional
management. Another challenge was to create a broadly open international economic
management system by which economic benefits be maximized with new forms of international
management: rounds and summits in which parties to such formations assume managing
responsibilities and enact microeconomic polities collectively.
It is worth mentioning that the most ambitious round of talks held this open international
economic management yet was the Uruguay Rounds which took place from 1986-93. Out of
ordinary, these talks included agriculture and services in the negotiations for the first time.
Nonetheless, one must not ignore the leadership challenges faced the U.S. during the
Bertton Woods period, contributing to its “twin deficits” in government spending and the balance
of payments. The weakened dollar and the weakening balance of trade in the 1970s and early
1980s made the U.S., Europe and Japan to be dissatisfied with U.S. leadership domination (2003,
6-7).

Globalization System
With the fall of Berlin Wall in 1989 and the collapse of the Soviet Union and its Eastern
Communist bloc, Globalization as a third international economic system emerged which
continues to this date.
Although globalization is a more sophisticated version of the economic interdependence
system; however, it has not reached a symmetric level of governance due to the international
political challenges which are summarized by Spero and Hart as: Firstly, world’s governments’
responsibilities for the economic well-being of their citizens in an era of competitive market
economy. Secondly, the capitalist market economies’ requirements which the former socialist
regimes need to adapt to, namely the democratization of their political systems. Finally, the
much needed decrease in equalities between the developed, developing and the underdeveloped
nations (2003, 10).
Along with these dominant issues, the World Trade Organization (WTO), which
superseded GATT in 1995, was given more powers to enforce free trade rules, and a clearer
mandate to promote free trade. However, during WTO’s new round of trade talks in Seattle in
1999, mass protests on the streets and disagreements between the rich and poor countries led to
failure. Furthermore, WTO’s Doha talks to ease trade restrictions and reduce poverty have yet to
gain any positive results since their inceptions in 2001 (Cho: 2005, 2).

Dominant issues of free trade

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Proponents of free trade claim that “Economies that are open to trade grow faster” (Panagariya:
2003). Meanwhile, critics of the free trade argue that the globalization system encourages the
exploitation of workers in poor countries and that the developed countries have maintained
protectionist policies, and that developing and underdeveloped countries do not have
manufacturing infrastructures to enjoy the benefits of free trade (Barker and Mander: 2000, 252).
The reluctance of the European Union (EU) countries, particularly France, over getting
rid of their agricultural subsidies and the U.S.’ most recent call on the developing counties to
open up their manufacturing industries to the U.S. and other developed countries are evidences
for the lack of a coherent economic governance system (Zedillo: 2007).
Another key issue in free trade is the liberalization of trade in services. This encompasses
banking, tourism, insurance and travel, amongst others. Talks have been proceeding on a sector-
by-sector basis, with much focus on telecommunications and financial services so far. However,
momentum for further opening up of banking services was slowed after the Asian financial crisis
of 1997-1998 (2003, 54-56).
Developing countries fear that the developed countries will press even for liberalization
of other sectors, such as public utilities, health and education. Critics of free trade say that this
could lead to poor people paying more to use these services (2000, 253). The World Bank argues
that service sector liberalization can benefit the poor if it leads to greater competition and thus
lower prices, but acknowledges that any such move would need to be properly regulated.
Moreover, one of the most contentious issues of free trade is WTO’s policies requiring
the developing countries to introduce measures to enforce intellectual property rights like patent
laws and copyright laws. Many developing countries argue that this prevented them from
producing, or importing, cheap generic versions of drugs that are used to treat diseases like Aids.
They want a blanket exemption from the rules in the event of a public health emergency.
However, both the U.S. and EU, the home of many major pharmaceutical companies, are
worried that if patents cannot be protected, companies will not earn enough money to finance
research and development of new drugs (2000, 253).
Still, another dominant issue that led to the collapse of the Seattle talks in 1999 is link
between trade and the environment. Campaigners were worried that rules on free trade would
make it impossible to enforce environmental standards, for example on protecting dolphins
caught in tuna nets. Many developing countries, however, are skeptical of such regulations, as
they could price them out of the market. They also fear that new food safety regulations could be
used as an excuse for protectionism, and argue that trade agreements should be clearly separated
from environmental matters (2000, 254).
Although the EU has endorsed the need for a link between trade and the environment;
however, the EU is concerned about issues like genetically modified food, where it wants
labeling so consumers can be informed about what they are eating. Also, the EU has been
concerned about food additives like growth hormones added to beef raised in the U.S. - and
wants to operate the "precautionary principle" of taking no risks before food stuff has been
proved safe (2000, 254).
Finally, during the Doha talks, the U.S. came under serious pressure to revise its rules on
"dumping." The US government unilaterally erected tariff barriers to be used when it believes
that another country is selling its goods at below the price of production. Many countries believe
that the US has long been abusing this loophole to protect its domestic industries. However, any
attempt to change US domestic laws on dumping will face opposition from trade unionists and
politicians, and accusations that the WTO is impinging on US sovereignty (Panagariya: 2003).
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Reference:

Spero, J. & Hart, J. “The Politics of International Economic Relations.” (Thomson/Wadsworth: 2003).

Zedillo, Ernesto. (Forbes, 9 May 2007) "Save the WTO From the Doha Round." Retrieved on 9 September, 2007,
from: http://yaleglobal.yale.edu/display.article?id=9158

Cho, S. (25 August 2005). The Troubled Status of WTO Doha Round Negotiations, ASIL Insight (American Society
of International Law).

Barker, D., & Mander, J. (June 2000). The WTO and Invisible Government. Peace Review, 12(2), 251-255.

Panaganiya, Arvind (December 2003). International trade. Foreign Policy. Issue 139, p20-28.