Trade Barriers

Reasons for Limiting Trade

Guell discusses the reasons a country would be willing to limit trade. He breaks these reasons up into the questionable and the beneficial reasons to limit trade. The questionable reasons are for protecting jobs within industries that have goods that can be imported better or cheaper. Often unions fight to keep jobs in these industries and only look at the short run costs of engaging in free trade. The long term benefits of allowing free trade will outweigh the short run losses. Governments may decide to not engage in free trade with other countries because keeping the goods produced at home provides important national security or national identity.

 Ways to Limit Trade

As discussed in class there are three different ways trade can be limited: tariffs, quotas, and not tariff barriers. Governments put tariffs in place which places a tax on the goods that are imported. This is the most widely used way to reduce trade. Quotas are legal restrictions on the amount of a good coming into a country. Quotas allow domestic producers to raise the price that they can charge for their good. Non-tariff barriers can be used by governments to place legal restrictions and make the import of a goods too costly. Countries use this method to protect its domestic land from harmful imports such as diseases, bugs, or parasites.

United States Trade History

The Great Depression of 1929

Close monitoring of trade is important. The Great Depression of 1929 started a three year collapse of world financial markets resulting in a world deflation of 48 percent and a 68 percent reduction of world trade.  Countries adopted what was called the “beggar thy neighbor” policy where they would try and export their financial problems by increasing exports and limiting imports. Tariff rates rose extremely high resulting in a trade war causing international trade collapse. Ultimately, the Great Depression led to a restructuring of the international trade system.

The Trade Agreements Act of 1934 

The purpose this act was to increase the U.S. exports to foreign countries. The Trade Agreements Act of 1934 delegated the president the authority to negotiate U.S. trade agreements and allowed the president to participate in negotiations for the purpose of lowering tariffs. This act was expanded especially after WWII to allow the imposition of restrictions when harmful domestic effects resulted from tariff cuts. This act helped lower the tariff rates in 1947 to approximately one half of the 1934 levels.

General Agreement on Tariffs and Trade

General Agreement on Tariffs and Trade (GATT) was established in 1948 as an interim measure pending the creation of the International Trade Organization. Plans for the International Trade Organization fell through and GATT continued to exist. GATT members agreed to trade without discrimination (called the most-favored-nation treatment), protect domestic industries only through tariffs, and establish stable trade. GATT also provided for regular meetings to consider other problems of international trade. The only exceptions permitted to GATT rules were those dealing with balance of payments difficulties, and these exceptions are carefully supervised. GATT provided the framework for most important international tariff negotiations from 1947 until 1994. An agreement reached in 1994 led to the creation of the more powerful World Trade Organization (WTO) as a replacement for GATT. A twelve month transition period existed to phase out GATT and phase in WTO.

Bretton Woods Agreement

The Bretton Woods system of was put in place to established the rules for commercial and financial relations among the world's major industrial states. The Bretton Woods system was the first negotiated monetary order in world history with the purpose of governing monetary relations among independent nation-states. The agreement was adopted to rebuild global capitalism as WWII occurred. 730 delegates representing all 44 allied nations met in Bretton Woods, New Hampshire. After deliberation the delegates signed the Bretton Woods Agreement in July of 1944. Setting up a system of rules, institutions, and procedures to regulate the international political economy, the planners at Bretton Woods established the International Bank for Reconstruction and Development (later divided into the World Bank and Bank for International Settlements) and the International Monetary Fund. These organizations became operational in 1946 after a sufficient number of countries had ratified the agreement.

The Bretton Woods system was created with two main goals. First, each country was obligated to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold. The second goal was for provision by the IMF of finance to help cushion temporary payments imbalances. The Bretton Woods system continued to get more strain and collapsed in 1971, shortly after the United States' suspension of convertibility from dollars to gold.