Economic perspective of the evolution of International Trade

In simple terms, cross-border trade may be defined as the exchange of capital, goods, and services across national borders. The jurisprudence behind international trade is that each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations. Thus, the idea behind cross-border trade is to achieve sustainable economic growth- something which is every country’s primary goal. The benefits of international trade may be summed up to be (i) lower prices; (ii) better products; (iii) improved political ties; and (iv) efficiency gains for domestic producers. Since the world at large is not self-sufficient, therefore a nation must find a third nation for trading because, without trade, each country will consume only what it produces. Trade enables consumption outside production possibility. Hence, more demand – more supply. As Adam Smith notes, countries should specialize in the goods and services in which they have an absolute advantage. Each country engaged in cross-border trade has the primary motive of expanding its markets on a worldwide scale. “In other words, countries share the benefits of each other’s technologies and innovations either by adopting the innovations in their own technology or exchanging the goods embodying the innovations. In this way, trade pushes the countries to concentrate on goods that they are best in producing and then exchange those goods with other goods leading to sharing of technology and innovations.”[1]

This post discusses the historical developments of international trade vis-à-vis the first multilateral trade agreement i.e. the General Agreement on Tariff and Trade (GATT) and a little bit history of the International Trade Organisation (ITO) –which eventually failed and finally the greatest international organization of all time after the United Nations – the World Trade Organization (WTO). This post further elaborates some historical events during the period when nation states used to run by protectionism measures, that is to say, most of the nation states including India had closed economies. Talking about India itself, till the year 1989, India had a mere 0.2% share in the international trade since it was a closed economy. In the year 1991, when India suffered from a balance of payment crises[2], it was only then India opened its economy to the world, and that too on the behest of the International Monetary Fund (IMF).[3]

Economics of International Trade

International trade stands on the broad shoulders of fundamental economics. In economics, a nation state’s natural endowment factor is commonly understood as the quantum of capital, labour, and land that the nation-state possesses and can exploit for its effective growth. However, throughout the world, no nation-state exist which is self-sufficient with regard to its own natural endowment factors. Since the world at large is not self-sufficient in almost everything, thus arose a need for cross-border trade. According to Adam Smith, a renowned economist, trade is “the invisible hand” in the world economy. David Ricardo, another distinct economist, postulated that demand and supply within a country can get saturated, therefore, in order to maintain equilibrium, a nation-state must find out the third country in order to maintain that equilibrium.[4] Paul Samuelson’s noted Stopler-Samuelson theory illustrates why and how trade liberalization benefits a nation states’ production factor and why trade with other nation states can prove to be a boon in many respects, in particular, vis-à-vis equal opportunities.[5] However, even though such theorems existed, still nation-states in the early days used protectionism measures and imposed tariffs on the import of goods.[6] Imposition of high tariffs had always been and still continues to be, defended by the hypothesis of protecting domestic firms from foreign competition. What nation states should understand is the importance of market intervention for improving the economy. For effective cross-border trade, it is imperative that a nation state allows markets to be without any boundary, as Jagdish Bhagwati noted in his famous study of the free trade.[7] The study further argues that the market intervention must not amount to obstruction and must be inconducive to global welfare.

If we delve into the economic causes of war, we can classify the problems in five groups namely: “(i) Interference with the trade of other nations through transit restrictions; (ii) The exclusion of people who wish to emigrate; (iii) Concessions for foreign investment; (iv) the interference with trade by tariffs; and (v) Most favoured nation clauses.”[8] To cut the long story short, the aftermath of Napoleonic wars lead to the establishment of the Congress of Vienna in 1815.  The Congress of Vienna worked a system of the concert of Europe, a system where states decided to come together and discuss problems related to peace. This system existed for a century and was exclusionary, i.e. only a few countries were a part of the system. This was not a permanent system and was merely an ad hoc one. Then came the sitting of the Hague Conferences in the year 1899 and 1907. The Hague Conferences were inclusionary and open to everyone and was a runway for the establishment of a permanent system/institution. Dating back to the 19th century, the establishment of public international institutions took place. The League of Nations established on January 10, 1920, was the first international organization to govern the working of nation states. The League of Nations was established after the conclusion of the first world war with a view to avoiding a repeat of the like devastating war. The objective was to maintain universal peace within the realm of principles accepted by all the member states. After the failure of the League of Nations came the London Declaration of 1941. Eventually, the United Nations was set up after the San Francisco conference of 1945.

This was in general an overview of the establishment of international organizations. Now, detailing the international trade scenario, after the United States enactments of 1921, 1924 and 1930, the world tariffs escalated to about 1000 percent. This eventually led to the great depression in the year 1930. The reasons behind the World War II can also be attributed to the economic policies of the United States. The rise of Hitler was also due to the fact that Jews were the major traders in Germany. Merlyn Kennes and John Whytes, two noted economists summarize economics by only two things, i.e. imports and exports and tariffs. Kenney another famous economist classifies the factors that affect the economy of a nation as (i) import and export; (ii) business practices; (iii) taxation methods; (iv) the labour issues; and (v) tariffs. The reason behind justifying the economic side of the trade is that international trade stems from economics. Thus, it is important to look into this side of the field as well, in order to have a different object of things. So, as it is now clear that economics, in particular, the imposition of tariffs, play a major role in shaping the international trade scenario we will look through this perspective.

Brief Historical Background

The United States mooted the idea of International Trade Organization (ITO) during the Havana Conference, 1947. However, the United States itself did not ratify it. As an outcome of the Conference and the failure of ITO (since the US did not ratify it) came the General Agreement on Tariff and Trade, 1947 (GATT). It was applied by way of a protocol. In the year 1951, the US was a major exporter in the international market. The first conference for GATT negotiations took place in Geneva wherein it was decided that the US will reduce its tariffs. The US had been sceptical about this fact up until the year 1974. From 1951 to 1995, GATT served as the backbone of international trade. In 1994 with the advent of the WTO the GATT 1947 was amended and the new GATT 1994 came into force.

“The period between the 1930s and 1940s experiencing the phenomenon of Great Depressions and Second World War acts as reminders of the dark phase of protectionism. There were many trade barriers implemented by the United States and European nations. Besides, level of tariffs was too high as compared to what developed countries will impose today[9]. Post World War II, most developing countries had refrained from fully participating in the global economy. But, gradually, this situation changed after the Uruguay Round negotiations in 1995.”[10] It is because of these negotiations that the developing nation states can now participate at almost the same level as the developed nation-states in the trade negotiations. As a result of which there was substantial involvement of developing nation states in the Uruguay Round of negotiations. As Martin and Winters note, “this led to the further involvement of the developing countries which was evident by their increasing participation during the Uruguay Round. Not only did they take part in formulating innovative guidelines for the global trading system but also carried out significant market access offers in reducing protection of tariff in the manufacturing and services sector trade”.[11] As a result of this, the primary development in the global trading system took place in the form of the World Trade Organization (WTO) details of which will be discussed in the forthcoming parts. “The underlying philosophy of WTO essentially lies in compulsory mandating of an open market, transparency and non-discriminatory trade policies, ensuring the welfare of all its member nations.”[12]


[1] Jonathan Eaton and Samuel Kortum, Technology and Bilateral Trade (National Bureau of Economic Research, Working Paper No. 6253, Nov. 1997), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=226011.

[2] Balance of payment (BOP) crises occurs when a country is unable to meet local demands, that is to say, when demand is in excess of the supply.

[3] As we all know that IMF lends money to nations suffering from balance of payments (BOP) crises, that too on a conditional basis. In 1991, when India suffered from BOP crises, it lended money from the IMF on the condition that India will open its economy to the world.

[4] See, S.C. Rankin, Supply and Demand in Ricardian Price Theory: A Re-Interpretation, 32 Oxford Economic Papers (Jul., 1980) 241-262.

[5] See e.g., Kenneth Rogoff, Paul Samuelson’s Contributions to International Economics, Harvard University (May 2005), available at https://scholar.harvard.edu/files/rogoff/files/samuelson.pdf.

[6] To quote a few examples of high tariff impositions, the United States in the 19th century imposed tariffs that routinely varied from 30 to 50 percent with the steepest average tariff going as far as 62 percent in the 1830s.

[7] See, Jagdish N. Bhagwati, The Case of Free Trade, 269 Columbia University Academic Commons (1993), https://academiccommons.columbia.edu/catalog/ac:156827.

[8] J. Russell Smith, Trade and a League of Nations or Economic Internationalism, 83 The Annals of The American Academy of Political and Social Science, International Economics (May 1919) 287-305, available at http://www.jstor.org/stable/1013753.

[9] Judith L et al, Institutions in International Relations: Understanding the Effects of the GATT and the WTO on World Trade, 61 International Organization 37-67 (2007), https://web.stanford.edu/~tomz/pubs/GRT_IO2007.pdf.

[10] Norman S Fieleke, The Uruguay Round of Trade Negotiations: An Overview, New England Economic Review 3 (May. 1995), at https://www.bostonfed.org/publications/new-england-economic-review/1995-issues/issue-may-june-1995/the-uruguay-round-of-trade-negotiations-an-overview.aspx.

[11] Will Martin and L Alan Winters, The Uruguay Round and the Developing Countries (Will Martin and L Alan Winters ed., CUP 1996).

[12] World Trade Organization, available at https://www.wto.org.

Siddhant Sharma

Siddhant is a Patent and Intellectual Property lawyer. He finds joy in exploring and writing about niche areas of law. He is finding better ways to describe the patent profession to a five-year old and a sixty-five year old.

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