1 What Shapes National Trade Policy

In the private enterprise economies of the world, the great dri-

ving force behind an expansive trade policy is and always has
been the commercial search for access to foreign markets and
sources of supply. It has forever been counterbalanced by hardly
less powerful commercial interests—those of the domestic produc-
ers and workers who have to face competition from imported
supplies. The balance of interest between groups in›uenced by
these opposing forces has never been static. It is in endless ›ux as
groups on both sides respond to economic growth and change at
home and abroad. Trade policy, however, is not simply the out-
come of the tug-of-war between these groups. Nations and the
political elites or parties who govern them have other aims
besides satisfying the wishes of commercial interests. Every-
where, national security takes precedence over commercial inter-
est. For the more powerful nations, trade policy has often been a
vehicle used in achieving the political aims of foreign policy.
Most recently, many citizens in Western countries now push for
the use of trade policy to advance human rights or to enforce
environmental or labor standards.
Besides such political concerns, trade policy is profoundly
in›uenced by prevailing ideas about what constitutes the national
economic interest. The ascendant ideas and beliefs are usually
consistent with the dominant commercial interests; but the intel-
lectual rationale that they provide for national policies also has to
be more broadly acceptable. Further, both current ideas and
interests work within an established framework of domestic laws
and institutions. Inherited from the past, the framework embod-
ies other ideas and interests that are usually not easily dismissed.
6
 WHAT SHAPES NAT IONAL T RADE POLICY
SEARCHING FOR MARKET S: T HE COMMERCIAL INT EREST
Throughout history, the primary commercial driving force
behind the trade policies of countries has been the search by their
traders and entrepreneurs for access to foreign markets and
sources of supply. Both the trade merchants of medieval times
and the heads of large corporations today have been assiduous in
seeking the help of their princes or governments in gaining easier
access to foreign markets and sources of supply. In generations
past, one course of action often resorted to by the more powerful
states was the use of force or the threat of force to create colonial
empires or “spheres of in›uence” that assured their traders or
manufacturers access, often on an exclusive basis. Indeed, such
use of force was elevated by the Marxist-Leninists into a general
explanation for the trade of the capitalist “imperialist” powers. As
Stalin put it, with his usual bluntness, “countries which consider
themselves inadequately provided with raw materials and export
markets try usually to change the position in their favor by means
of armed force” (quoted in Kissinger 1994, 440). While such an
explanation of trade relations may seem mildly ludicrous to most
of us today, ample support can be found for it in the history of
earlier centuries, and many people in developing countries now
subscribe to this imperialist interpretation. But even in the nine-
teenth century or earlier, it failed lamentably to provide an expla-
nation for the evident and vigorous growth of trade among coun-
tries that were in no sense threatened by each other. In relations
among states where military force was not a feasible or desirable
means of gaining access to markets or supplies, the instruments
that countries turned to were trade policy and trade diplomacy.

Industrial Development as the Driving Force

The commercial search for access to foreign markets and sources
of supply has greatly intensi‹ed over the last two centuries as
industrialization has taken root and spread throughout the world.
The endless advance in technology, organization, and skills that
raises productivity and drives economic growth has given a pow-
erful impetus to foreign trade. The long and continuing decline in
transport and communication costs, aided in the nineteenth cen-
tury by such transforming innovations as the railroad and the
7
 RELUCTANT PART NERS
steamship and symbolized today by the advent of the Internet,
has greatly lessened the natural barriers that distance imposes on
trade. At the same time, the opportunities for specialization have
been vastly enhanced as markets have grown and as the intro-
duction of new products has diversi‹ed output.
Such dynamics have caused world trade to rise faster than
world output over most of the decades since the onset of the mod-
ern industrial era (see table 1). The upward trend in the share of
world output that is traded was broken only during the interwar
years, when the economic dislocations of the 1920s were suc-
ceeded by the Great Depression of the 1930s. It was sometime
after the Second World War before the share of trade recovered
to the level it had attained at the end of the belle epoque, but the
share of output that is traded as merchandise exports today is
almost double what it was in 1913. (It stood at over 22 percent of
gross domestic product in 1998—a measure that takes no account
of trade in services, which could raise the share to as much as 28
percent.)
Since the early nineteenth century, the composition of mer-
chandise trade has gradually shifted in favor of manufactures.
After industrialization ‹rst took off in Britain, a signi‹cant part of
international trade became an exchange of factory-made manu-
factures for primary commodities. In the later nineteenth century,
as other countries industrialized, some measure of interindustry
specialization appeared, and the exchange of manufactures for
manufactures started to grow. Only after the Second World War,
however, did the value of trade in manufactures begin to over-
shadow that of primary commodities.
The core of postwar trade has been the exchange of manufac-
tures and semimanufactures among the industrially more estab-

TABLE 1. World Merchandise Exports as Percentage of Gross Domestic

Product
1850 1880 1913 1950 1973 1985 1993 1998
5.1a 9.8a 11.9a 7.1 11.7 14.5 17.1 22.4
Source: World Bank 1995. The 1998 estimate is based on data from World Trade Organization 1999.
aData refer to OECD countries only.

8
 WHAT SHAPES NAT IONAL T RADE POLICY
lished countries of North America, Western Europe, and Japan. It
has increasingly taken the form of an exchange of products com-
ing from within the same industries and differentiated only in
quality, price, or design. In the last two or three decades, the
extent of specialization in world trade has taken another large
step, appearing at the level of component parts traded within
individual ‹rms. Innumerable corporations have outsourced part
or even all of their production to their af‹liates in other countries.
Many ‹rms have gone further: their production is now broken
down among different facilities located in several countries, with
the assembly of the ‹nal product taking place close to the markets
of yet other countries. According to estimates by the United
Nations Conference on Trade and Development (UNCTAD),
perhaps roughly one-third of world trade in goods and services
during 1993 consisted of intra‹rm trade between multinationals
and their af‹liates.1
When we look at the economic histories of most countries, it is
evident that industrialization has been of underlying importance
in bringing about shifts in national trade policies. Certainly, there
is no simple and mechanical relation; as I will discuss later in this
chapter, prevailing ideas about economic policy have also been
in›uential in affecting the timing of the shift in policies. But a
country’s move toward greater trade cooperation has commonly
occurred when manufactures have begun to account for a sub-
stantial share of its total exports.
There is a simple reason for this. As exporters of primary com-
modities, countries have generally faced low trade barriers. Cer-
tainly, this has generally been true for exporters of agricultural or
mineral raw materials and of noncompeting foodstuffs; only for
competing agricultural products have trade barriers been a major
and persistent issue—especially in the latter part of the twentieth
century. In manufactures, however, the case has been consistently
different. As a consequence, governments wanting to satisfy their
own manufacturing interests but faced with protectionist barriers
abroad have been pressed into negotiating with other countries to
gain access to the latter’s markets.
The export history of the United States provides an instructive
example. Total U.S. merchandise exports in 1969 actually com-
9
 RELUCTANT PART NERS
prised a smaller share of gross domestic product than was the case
one hundred years earlier. Still, U.S. trade policy shifted dramat-
ically over that period, from highly protectionist to relatively
open. Matching this change was a rise in the share of manufac-
tures in total U.S. exports (see table 2). Manufactures did not bulk
larger than primary commodities in the United States until the
interwar years, and as I shall discuss in chapter 4, a real change in
attitude toward trade policy began to take place only then. A sim-
ilar rise in the share of manufactures in total exports has been tak-
ing place over the last thirty years in a growing number of devel-
oping countries. As table 3 shows, manufactures now bulk large
in the exports of a number of developing countries that have been
industrializing fast. It is not surprising that the attitude of these
countries toward trade cooperation has likewise been changing,
as I will discuss in chapter 8.
In its later stages, industrialization has been accompanied by a
search for foreign markets by service industries (paralleling the
same search by manufacturing industries). While long present,
this search by service industries gained a new impetus in the last
quarter of the twentieth century, as broad economic policies
within countries underwent signi‹cant changes. When countries
began to deregulate and privatize major service industries, such
as ‹nancial services or telecommunications, new opportunities
for private capital opened up, and pressure for governments to
gain access to foreign markets mounted. World trade in services

TABLE 2. Exports of Manufactures as

Percentage of Total Merchandise
Exports, United States
Year Percent of Total Merchandise Exports
1869 22
1889 23
1909 41
1929 63
1949 66
1969 80
1989 79
Source: U.S. Bureau of the Census 1976; and U.S.
Bureau of Economic Analysis 1991.

10
 WHAT SHAPES NAT IONAL T RADE POLICY
consequently burgeoned, outpacing the growth of trade in manu-
factures. This has been of especial importance in altering the con-
tent of the most recent international trade negotiations, extending
them beyond trade barriers to include domestic laws and regula-
tions that govern the operation of enterprises in speci‹c service
industries.
Foreign investment has likewise been in›uential in affecting
the commercial interest of countries in each other’s markets.
Signi‹cant in the era before the First World War, then falling
away in the interwar years, it has undergone a great expansion
over recent decades. Some of the motives behind the recent
expansion have been the same as in postwar decades. Direct
investment, especially in developing countries, has continued to

TABLE 3. Exports of Manufactures as Percentage

of Total Merchandise Exports, Selected Developing
Countries
Percent of Total Merchandise Exports
Country 1965 1985 1998
Argentina 6 18 35
Brazil 9 41 54
Egypt 20 10 38
Hong Kong 89 95 93
India 49 49 75
Indonesia 4 11 44
Korea, Republic of 61 91 86
Malaysiaa 6 27 79
Mauritius — 30 70
Mexicoa 16 28 85
Morocco 5 40 32
Pakistan 36 63 84
Philippinesa 6 51 88
Singapore 34 58 85
Thailand 4 35 74
Tunisia 19 42 78
Zimbabwe 29 25 27
Source: World Bank 1987, table 12. World Trade Organization 1999,
table IV, 31.
Note: Definitions of manufactures for 1965 and 1985, on the one hand,
and for 1998, on the other, differ slightly: the former include SITC 9 (com-
modities not classified elsewhere).
aData for these countries include significant exports from processing

zones.

11
 RELUCTANT PART NERS
be undertaken in order to gain market access by leapfrogging
over trade barriers or in order to secure access to raw materials.
Some direct investment has also taken advantage of the low wage
costs in developing countries and has been linked to new oppor-
tunities for global specialization within ‹rms in the production of
speci‹c manufactures. But the most notable thing about the
recent expansion in foreign direct investment is that it has been
dominated by investments within and among the industrially
more established countries. The investments have been mainly
undertaken not to overcome barriers that impede exports or to
tap cheaper sources of supply for the home market but, more sim-
ply, to increase the sales of corporations and strengthen their
competitive position in an increasingly uni‹ed market.2

Competing Commercial Interests

The commercial interests pushing for easier access to foreign
markets have almost always had their counterpart at home in
demands to restrict foreign access to the domestic market. The
trade of individual countries is always a two-way process, and
(unless there are large out›ows of capital) an expanding export
trade is inevitably matched by rising imports. In medieval and
renaissance Europe, traders perhaps encountered little opposition
at home to the merchandise that they brought from other coun-
tries, such as silks or spices from Asia, since these did not threaten
to supplant domestic production. Likewise, all countries today
import some products that are noncompeting since their produc-
tion depends on natural advantages that the importing countries
do not have; imports of petroleum or of tropical fruits by temper-
ate climate countries are examples.
More generally, however, imports are in actual competition
with domestic production or could potentially be replaced with
domestic substitutes. So, in modern times, an endless internal
con›ict between those commercial interests threatened by
imports and those oriented around exports has been the hallmark
of trade policy.3 This has posed an insoluble dilemma for gov-
ernments; in assisting their export industries to gain easier access
to the markets of other countries, they have been confronted with

12
 WHAT SHAPES NAT IONAL T RADE POLICY
demands from the other countries for comparable improvements
in access to their own market, running counter to the interests of
those at home who are threatened by imports.4

T he Endless T ug-of-War
In any country, the composition of the con›icting commercial
groups and the relative intensity of the pressures that they seek to
exert on their government change ceaselessly over the years.
Objective economic circumstances, both within the country and
in the international economy, endlessly modify the composition
and preferences of the two groups. Over the term of several
decades, the most important source of internal economic change
is economic growth itself; this creates structural changes that lead
to the emergence of new export activities. Comparable unending
changes also take place in the international economy. Long-term
economic growth in other countries brings about global shifts in
comparative advantage among individual industries and activi-
ties, and these shifts have inevitably had adverse effects on the
older producers. One example is the shift to developing countries
in comparative advantage in textiles and apparel that has taken
place over the last twenty to thirty years. Another is the emer-
gence in the 1870s of the regions of recent European settlement in
the Americas and Oceania as huge, low-cost producers of tem-
perate climate agricultural products.
Changing macroeconomic conditions over shorter periods,
both at home and abroad, also affect export- and import-compet-
ing interests, altering the balance of opposing pressures that they
bring to bear on their government. One destabilizing source can
be ›uctuating exchange rates. The kind of instability that beset
the international monetary system in the 1920s or the large cur-
rency misalignments that have recurred since the early 1970s, for
instance, repeatedly affected the balance of interests between
exporting and import competing industries. A more general
experience is the effect of recessions at home in intensifying pro-
tectionist sentiment; in prosperous times, politicians are more
likely to shrug off the economic dislocations caused by foreign
competition than in periods of recession or stagnation. The busi-

13
 RELUCTANT PART NERS
ness failures and the social distress suffered by workers are likely
to evoke a more sympathetic response when there are many in
society who feel that their economic security is under threat.
However, it would be a great mistake to conceive of trade pol-
icy as no more than a summation of the in›uences exerted by
competing commercial claims. The struggle of con›icting com-
mercial interests to gain recognition for their claims takes place
within a larger national environment where collective ideas about
political aims and economic policy also have their impact. In
open societies, the debate about policy is carried on endlessly in
the political arena, in the media, and in academia, while in more
closed societies, it may be largely con‹ned to of‹cial circles. In
both cases, there are two separately identi‹able strands to these
ideas and beliefs. One is the foreign policy that trade policy may
serve. The other is comprised of the ideas and beliefs about eco-
nomic and trade policy that best suit the nation.5

T RADE, PEACE, AND SECURIT Y

Over the centuries, nations allying themselves with others have
sought to strengthen their ties by promoting trade cooperation.6
Innumerable bilateral treaties of commerce—often pointedly
called treaties of commerce and friendship—have been signed and
honored. In modern times, trade policy has served political aims
in more dramatic and far-reaching ways through the formation of
customs unions and free trade areas. A prime instance in recent
history was the signing of the Treaty of Rome in 1957, which
founded the European Common Market. While the Common
Market was advanced mainly on grounds of its economic
bene‹ts, an underlying motive of its architects was to bring an
end to the long and bloody history of political and military
con›ict among European nations. It was with a parallel motive of
promoting uni‹cation that Prussia came to use the creation of a
common market among the German states in the early nine-
teenth century. On the North American continent, the inclusion
of Mexico in the North American Free Trade Agreement fur-
thered U.S. foreign policy in cementing its southern neighbor into
the free market system.
The instance most directly relevant to the present history of
14
 WHAT SHAPES NAT IONAL T RADE POLICY
advances in multilateral trade cooperation is the American initia-
tive that was taken after the Second World War to establish a new
trade regime. In no small part, the drive to establish the regime,
as well as to set up the Bretton Woods institutions, derived from
the conviction, held ‹rmly by Secretary of State Cordell Hull,
that the economic nationalism of the interwar years had greatly
exacerbated political tensions and antagonisms among states and
had contributed to the outbreak of war. A framework of rules and
institutions was conceived to ensure that the postwar conduct of
economic relations among nations would not revert to its former,
anarchical and mutually destructive state. It was a remarkable
piece of economic statesmanship and the basis for subsequent
progress in trade cooperation. The new economic order might
not have materialized had it not been seen to serve this larger,
political purpose. (American commercial interests could have
been met by more modest means, such as the negotiation of a
series of bilateral trade treaties.) In the years that immediately fol-
lowed, the increasing preoccupation of American foreign policy
with the Cold War only added strength to a trade policy that
made the multilateral trade regime its cornerstone. As the United
States and the Soviet Union vied with each other to draw other
states into their camps, the participation of these states in the mul-
tilateral trade regime was a way of linking them to the West.7
The large view of trade policy as an instrument for encourag-
ing more paci‹c relations among states was not a new strand of
thought in foreign policy. Though Cordell Hull had arrived at his
assessment of the political bene‹ts of an open trading system
through his re›ection on a different, particularly turbulent histor-
ical experience, he shared his belief with some of the great British
economic thinkers and publicists of the nineteenth century.
David Ricardo wrote in his panegyric to free trade that it not only
raises the ef‹ciency of production but also “diffuses general
bene‹ts, and binds together by one common tie of interest and
intercourse, the universal society of nations throughout the civi-
lized world” (Ricardo 1951, 133–34). Richard Cobden was even
more insistent on the political bene‹t of trade; like Ricardo, he
stressed the common interest in their material well-being that
manufacturers and workers of different nations created through
15
 RELUCTANT PART NERS
the exchange of their products. John Stuart Mill, too, lent his
authority to the same benign interpretation of the political bene‹t
of trade.
Most of us today take a less sanguine view but could nonethe-
less agree that expanding trade relations are, if anything, likely to
moderate other sources of tension among nations. In the long
debate that took place in the United States during the 1990s about
trade relations with China, for instance, some sensibly empha-
sized the political dangers of excluding China from the world
trading community, pushing it into adopting more self-suf‹cient
policies that almost surely breed a more nationalistic view of the
world.

Is a Hegemon Necessary?
The major role that U.S. foreign policy played in creating the
postwar multilateral trade regime was, for a time, taken by some
American political and economic thinkers to indicate that trade
cooperation depended on the existence of a hegemonic power.8
The view was that in the absence of a supranational authority that
imposed its will on countries, only the existence of a hegemonic
power—willing to persuade, cajole, and bully other states—could
bring about cooperation; otherwise, states would remain caught
up in their egoistical and shortsighted calculations. Proponents of
this view supported it by pointing to the positive state of trade
cooperation in the decades before the First World War and after
the Second World War and to its parlous state in the interwar
years. The periods of cooperation mostly coincided with the Pax
Britannica and the Pax Americana. In the interwar years, by con-
trast, Britain’s power had drained away, while the United States
had refused to assume the hegemonic mantle.
But the argument claimed too much. As I shall discuss in chap-
ter 3, Britain did not play an active role in promoting the network
of trade agreements that formed the elements of a new trade
regime in the latter part of the nineteenth century. Likewise, the
need for a hegemon, such as the United States, has not proved a
precondition of trade cooperation throughout all the years since
1945. Though the U.S. role in promoting trade cooperation over
the decades immediately following the Second World War was
16
 WHAT SHAPES NAT IONAL T RADE POLICY
much less equivocal than had been that of Britain in the nine-
teenth century, its hegemonic status gradually eroded as the
nations of Western Europe and Japan established themselves as
other centers of economic power. It has not simply been the over-
whelming power of one country that has pushed others into acced-
ing to trade cooperation; it has been their recognition that cooper-
ation advances their own economic and commercial interest.
Of course, the dominant country has not refrained from exer-
cising its power. Between the hegemonic model (in which the
dominant power is able to impose its wishes on others) and the
cooperative model (in which equally powerful countries freely
enter into agreements with each other), there is a spectrum of pos-
sible relations. Relations between the very powerful and the very
weak are closer to the former model, while those between the
somewhat more powerful and the somewhat less powerful lie
closer to the latter.
If not acting as a hegemon, the role of the United States has
nonetheless been critical for trade cooperation in the postwar
years. Without a leader to generate proposals for cooperation, to
initiate discussions, and to confront others with negotiable deals,
the global willingness to cooperate might have languished. It is
only the largest and most powerful country that can exercise such
leadership; the game could not be played if the principal player
opted to sit on the sidelines.

ECONOMIC IDEAS AND BELIEFS:

FREE T RADE AND NOT-SO-FREE T RADE
Ideas about the economic and trade policies that governments
should pursue come from many sources and vary greatly in their
level of intellectual sophistication. They run the gamut from, on
the one hand, emotional appeals to nationalist sentiment that
lightly cloak the self-interest of particular producers or workers
to, on the other, intellectually disciplined analyses of national
interest that respect both logic and fact. The most carefully rea-
soned arguments have come from economists. Over the genera-
tions, however, economists—no less than others—have put forward
different and con›icting ideas. They have been in›uenced by the
economic circumstances of their times, by the political and social
17
 RELUCTANT PART NERS
institutions of the countries within which they have lived and
worked, and by their own political beliefs (not least the role they
assign to the state in economic and social affairs).
Beyond economists, the circle of people who in›uence opinion
and make decisions about trade policy is wide and diversi‹ed.
Each individual brings his or her own, more general understand-
ing of political and economic affairs to the assessment of policy.
For many the prescriptions of economists—drawn as they are
from theories that focus only on economic activity and that
abstract from the interconnected social and political conditions of
real life—may seem too narrow to serve as a solid guide to policy.
This is especially true for political leaders, who, by the nature of
their business, are always searching for ideas that seem best to
“‹t” the preferences of their supporting political coalitions.
Whatever level of intellectual sophistication underlies them,
the ideas and beliefs that have played some part in in›uencing or
substantiating trade policies can essentially be differentiated by
one key yardstick: the extent to which they have either favored or
distanced themselves from free trade. Those favoring undiluted
free trade have set the extreme limit to the debate. Their critics,
while accepting that bene‹ts ›ow from trade, have argued for
varying degrees of protection in particular circumstances. In prac-
tice, the trade policies of most countries have re›ected a mix of
ideas, a mix that has changed over time as both national and
international circumstances have altered.

The Free Trade Doctrine

The argument in favor of free competition in international trade
is based on the simple and commonsensical notion that it is
always best to buy in the cheapest market and to sell in the dear-
est. The idea that a country’s national interest is best served if it
specializes in whatever it produces more ef‹ciently and if it
imports what it produces less ef‹ciently has long appealed to
many of the smaller countries of the world whose size precludes
highly diversi‹ed production. It should be no surprise that the
smaller countries of Western Europe, for example, have been
among the most enthusiastic advocates of an open, multilateral
trading system.9 The openness of the trade policies of Hong Kong
18
 WHAT SHAPES NAT IONAL T RADE POLICY
and Singapore are also indicative of the in›uence of size in favor-
ing the idea of specialization. But the outstanding historical exam-
ple of a country embracing specialization as the foundation of its
trade policy is Britain from the mid–nineteenth century to the
outbreak of the First World War. As I will discuss in chapter 3,
Britain was then exceptional in its unequivocal adoption of a free
trade policy.
Among economists, the line of thought supporting free trade
has had a long and distinguished history.10 Adam Smith took up
the simple notion of buying in the cheapest market and selling in
the dearest and applied it to trade among nations. He saw the
advantage of free trade, not only in the exchange of currently pro-
duced goods, but also in the increasing specialization that would
follow from the expansion of markets. David Ricardo took the
logic further and demonstrated that even if a country could pro-
duce all its manufactures or agricultural commodities more
ef‹ciently than its neighbor, it would still ‹nd it advantageous to
trade (because of differences between the two countries in the rel-
ative ef‹ciency with which each produces speci‹c products).
Among mainstream economists in the Anglo-Saxon, neoclassical
tradition, the logic of free trade has been forcefully advocated
right up to the present day, even though recent strategic trade the-
ory has raised some signi‹cant quali‹cations.11
The prescription on trade policy from classical and neoclassi-
cal economists is inextricably linked with their belief in freely
competitive markets. The central message of neoclassical theory
is that freely competitive markets (which presume a set of social
institutions that respect private property and freedom of contract)
result in the most ef‹cient allocation of productive resources
among different possible uses and therefore bring about the opti-
mum output of goods and services. (The theory deals with the
allocation of existing productive resources and has less conclusive
things to say about the process of increasing the volume and pro-
ductivity of these resources to generate economic growth.)
The neoclassical view of free trade is presently in the ascen-
dancy in economic circles within the United States, as it was in
Britain during the country’s heyday in the nineteenth century as
the leading world industrial power. Its in›uence on policy toward
19
 RELUCTANT PART NERS
the end of the twentieth century was nowhere more evident than
in what John Williamson dubbed the “Washington consensus,”
the set of views that U.S. administrations and international ‹nan-
cial agencies held on the economic policies that developing coun-
tries should pursue. Together, these administrations and agencies
urged trade liberalization as part of a package of measures—
including conservative ‹scal and monetary polices, the deregula-
tion of ‹nancial markets, and the privatization of public enter-
prises—designed to establish free competitive markets. (They did
so with little regard for the wide differences among countries in
the inherited social institutions or in the stages of development, or
for the limited relevance of the theoretical base for the problems
of economic growth.)

Popular Criticism of Free Trade

Numerous economic commentators from various times in history
have ›atly rejected the cosmopolitan, free market view of the
world economy and have advocated more restrictive trade poli-
cies instead. In their approach to international trade, they have
begun from a more frankly nationalistic position. Some have put
forward powerful economic reasons for their position. Others
have made less rigorous cases but have nonetheless struck a pop-
ular chord with electorates.12 Among the latter are many recent
commentators, both in the United States and the European
Union, who have leaned toward the realist view of the world as
composed of nation-states endlessly vying with each other for
political or economic advantage. Seeing trade in that context,
they have portrayed it as a competitive struggle among nations.
For them, it is not a mutually advantageous exchange of goods
and services but a zero-sum game in which there are winners and
losers. Trade de‹cits with other nations are read as evidence that
the game is being lost. Closely related—in rhetoric if not in logic—
is the fear that increasing imports of manufactures from low-wage
developing countries are depressing wages in the developed
countries and generating unemployment.
Neither of these views are new; both have recurred, with slight
changes, again and again in modern history. The ‹rst view has its
roots in the mercantilism of the seventeenth and eighteenth cen-
20
 WHAT SHAPES NAT IONAL T RADE POLICY
turies, when the wealth of nations was seen as a ‹xed quantity to
be struggled over and (until Adam Smith challenged this major
premise) not as something that could be increased through eco-
nomic change and innovation. The second view also has a long
history. Judith Goldstein has observed that in the United States
during the decades between the Civil War and the First World
War, the persistent theme of congressmen in election campaigns
was the need for protection of the manufacturing industry, to safe-
guard the high-wage economy from being undermined by
imports produced by “pauper labor” in Europe (Goldstein 1993).
Such arguments have always been popular with those working
in import-competing industries, but they have gained broader
support because of their apparent common sense. The arguments
do not counter the free trade logic demonstrating that trade is
mutually advantageous; they simply ignore it.13 Though ›awed in
logic, they re›ect, at root, a legitimate reaction to the social costs
of the economic adjustments that are inescapable in a world of
dynamic technological and economic change.

The Keynesian Critique

Undoubtedly, there have been periods in economic history—and
there may well be again—when the international economy has
justi‹ably seemed to be an anarchical and dangerously unstable
place. It has sometimes been dif‹cult, even for the most inveter-
ate optimists, to take a benign and cosmopolitan view of the
world economy. Such were the conditions that followed the onset
of the Great Depression, and the response was widespread advo-
cacy of more nationalistic trade policies.14 In defending import
controls and, more especially, restrictions on international capital
›ows, John Maynard Keynes was among the most cogent advo-
cates of this view. Its advocates argued that under the circum-
stances of massive unemployment of both labor and productive
capacity, the impoverishment of a nation could only be relieved
by taking measures to increase the domestic utilization of these
productive resources; if these measures con›icted with open
trade policies intended to exploit comparative advantage, they
should nonetheless override the latter, since they would yield
greater present bene‹t. The ghost of this argument often haunts
21
 RELUCTANT PART NERS
countries when they are hit by recession.15 Action on this basis,
however, is usually held back by the knowledge that if other
countries retaliate, exports could decline too, thus offsetting any
gains in employment in newly protected industries.

Protection and Economic Growth

The argument in favor of protectionist policies that has histori-
cally carried most weight, at least among economists, has been
related not to the business cycle but to economic growth and
development. The most powerful reason economic commenta-
tors have found for rejecting the free trade doctrine has been the
disparity that they have seen to exist between their own nation’s
level of development and that attained by other, industrially
more advanced countries.
Alexander Hamilton, for instance, was an early exponent of
this view. He saw no reason why the citizens of the newly
founded United States should not be as adept at producing indus-
trial goods as their erstwhile enemies and distant cousins in En-
gland; his country possessed the markets, the natural resources,
and a skilled and enterprising people.16 As the ‹rst secretary of
the treasury, he was able to translate his own ideas into action
(which, incidentally, he did on his own initiative, not merely in
response to pressures from commercial interests). He stood ready
to make extensive use of his power and in›uence to support new
enterprises through import duties, bounties, and bank credit. He
was in fact instrumental in forming a corporation that selected a
“green ‹eld” industrial site in New Jersey (named Paterson after
the then governor) and that built factories to house textile
machinery.17
Some decades later, in the 1840s, Frederick List, impressed by
the industrial predominance of Britain and eager that Germany
should attain comparable strength, put forward a similar case for
protectionist policies in more articulated and extensively rea-
soned form (List 1885). His argument came to be known as the
“infant industry argument.” Protection of new industries from for-
eign competition was justi‹able on the grounds that these indus-
tries required time to learn the new industrial skills that were nec-

22
 WHAT SHAPES NAT IONAL T RADE POLICY
essary to become competitive with the more established foreign
enterprises.
Whether directly in›uenced by the infant industry argument or
not, almost all countries with relatively developed economies
have, at some time, resorted to signi‹cant protection to promote
domestic industrialization. In the nineteenth century, the nascent
industries of Western Europe and of North America grew up
behind protectionist barriers, and Japan had begun to follow suit
by the turn of the century. In the ‹rst half of the twentieth cen-
tury, the same pattern was followed in the countries of Eastern
and Central Europe, and after the Second World War, they were
joined by the numerous industrializing countries of Asia, Africa,
and Latin America.
It is not plausible to say that these shifts in trade policy can be
explained solely by the responses of governments to the demands
of new manufacturing industries. For some countries, such as
Japan or Russia, the need to build defense industries was an
important incentive. But more generally, countries have been
motivated by a strong sense of economic nationalism. Not only
entrepreneurs but national elites have wanted to see industrializa-
tion take root and prosper within their own territories. They have
embraced measures that would encourage their own citizens to
‹nd ways of making their own national resources more produc-
tive both by utilizing and adapting imported technologies and by
improving their own skills, organization, and methods of produc-
tion. But in a world already populated by more technologically
advanced nations, their nascent industries faced competition from
foreign industries that were already well along the learning curve
and that enjoyed external economies not available to newcomers.
Most countries have believed that without protection, they would
have deprived themselves of the opportunity to initiate the
indigenous process of learning new skills and of creating more
ef‹cient ways of production, a process that lies at the heart of eco-
nomic modernization. Indeed, it is a fair speculation that in the
absence of such nationalistically driven industrialization, the geo-
graphical spread of industrial modernization would be much less
than it is today.

23
 RELUCTANT PART NERS
Protection and Trade Cooperation
The pursuit of protectionist policies has by no means been incon-
sistent with advances in multilateral trade cooperation. In an
analysis of the conditions favoring trade cooperation, the proper
contrast to be drawn is not between countries pursuing open
trade policies and those pursuing protectionist policies but
between countries pursuing export-oriented policies and those
following more inward-oriented policies.18 Throughout modern
economic history, the use of protectionist measures has proven to
be quite consistent with the search for foreign markets and the
vigorous growth of exports.
In recent decades, the most successful industrializing countries
in Southeast Asia—South Korea and Taiwan—amply illustrate the
combination of export promoting and protectionist policies. The
ideas about trade policy that have been in›uential in these coun-
tries (and, in earlier decades, in Japan) have recognized both the
value of specialization in the international economy and the need
for protection of infant industries. These countries have under-
stood that by linking the development of some industries to for-
eign as well as domestic markets, they could tap into the bene‹ts
of specialization (economies of scale, externalities, technological
innovation) in the process of their own industrialization. What
differentiated them from the world of neoclassical free trade the-
ory is that their governments did not leave the identi‹cation and
emergence of these new industries to the free market but partici-
pated actively in their selection and fostered their growth through
the use of speci‹c policy measures. A condition of such active
participation has been a pattern of close government-business
relations entirely different from that assumed in the Anglo-Saxon,
neoclassical model of free competition. They have broken ranks
with the free trade protagonists who stress that the free play of
market forces, operating within the environment of an open trade
policy, will bring about the most ef‹cient use of productive
resources.19
The earlier postwar trade policies of many developing coun-
tries—particularly in Latin America, but also in India and else-
where—conformed more to the inward-looking model, and these
countries were generally less active in searching for access to for-
24
 WHAT SHAPES NAT IONAL T RADE POLICY
eign markets. That was not simply—or even mainly—because lev-
els of protection were high. It was because they pursued a com-
bination of policies (e.g., on trade or the exchange rate) that
undermined the incentive to export. Protectionist measures, how-
ever, can justi‹ably be blamed as a contributory factor, since high
levels of protection channeled labor and capital into high-cost
industries that could not become internationally competitive.
Domestic producers earned comfortable returns and acquired a
vested interest in the retention of protection. Worse from a long-
term point of view was the fact that if they enjoyed a monopolis-
tic or oligopolistic position in the domestic market, these indus-
tries were relieved of the need to make the innovations that
continually improved their competitive ef‹ciency. The learning
and adaptation that had taken place at ‹rst behind protectionist
barriers could largely give way, in the absence of any competitive
spur, to a tolerance of high levels of inef‹ciency. But all this was
not to be laid at the doorstep of protection per se; it was the fault
of excessive and indiscriminate protection.

INST IT UT IONAL CONDIT IONS

Both commercial interests and ideas about trade policy can only
gain expression through a country’s established political institu-
tions. Current policy decisions are made within institutional con-
ditions that are inherited from the past, and these conditions
embody the interests and ideas dominant in former years. It need
hardly be said that these conditions can greatly affect both the
timing and the content of shifts in national trade policies.
In open societies, the different commercial and labor interests
press for policy changes through the political parties, industry
associations, trade unions, other nongovernmental organizations,
and personal ties. The outcome is shaped by how the changes are
perceived as affecting other political and social groups, by the dis-
tribution of political power among the groups, and by the pre-
vailing ideas and beliefs about the national interest. It can some-
times be a long time, however, before the actual distribution of
political power catches up with shifts in the balance of commer-
cial interests.
A clear example is the decades-long struggle by manufacturing
25
 RELUCTANT PART NERS
interests in Britain during the nineteenth century to abolish the
Corn Laws. These laws protected domestic agriculture and raised
the price of staple foods for the working masses, and the manu-
facturers believed that this raised wages and undermined their
competitive advantage. But despite the manufacturers’ status as a
powerful commercial interest and despite the intellectual support
coming from the widely acclaimed free trade doctrine, Parlia-
ment resisted repeal for decades. Repeal directly threatened the
economic interests of the landed aristocracy and gentry, who
comprised the class that dominated Parliament. A realistic assess-
ment of this situation caused the leader of the Anti–Corn Law
League, Richard Cobden, to insist that political reform of the
electoral system was the precondition for the abolition of the
Corn Laws. Of course, such reform was also a long uphill strug-
gle. (In one of the twists of history, Cobden was, in the end,
proved wrong. Repeal of the Corn Laws came before electoral
reform, in part because of the unrest caused by the bad harvests
of the “hungry forties.”)20
A still more idiosyncratic instance of how institutional condi-
tions affect the timing and content of shifts in trade policy comes
from the United States, and it has had large consequences for the
progress of trade cooperation in the world as a whole since the
end of the Second World War. At the time when the U.S. Con-
stitution was drawn up, tariffs were a major source of public rev-
enue. The Constitution assigned revenue-raising powers to Con-
gress as the legislative body. This meant that trade policy came
within the purview of Congress rather than that of the president,
the head of the executive branch of government. The business of
tariff setting was thus drawn into local politics. It became a back-
scratching exercise in which congressional representatives helped
each other to pass legislation that raised tariffs to please particular
commercial or labor interests within their constituencies. With
such an institutional arrangement, negotiations with other coun-
tries for mutual reductions in tariff barriers were impractical.
Only after the Great Depression, when the reaction against the
notorious Smoot-Hawley Tariff Act put tariff raising beyond the
political pale, did Congress agree to delegate some of its powers
to the president. The delegation of power was highly conditional,
26
 WHAT SHAPES NAT IONAL T RADE POLICY
however; and since the 1930s, there has been a long, slow, uncer-
tain expansion in the negotiating powers that Congress has
granted the president. Because of the leading role that the United
States has played in postwar trade cooperation, this gradual insti-
tutional change has (as I shall demonstrate in this book)
signi‹cantly affected the pace of advances in multilateral trade
cooperation.21
In the present day, the multilateral trade regime itself, as rep-
resented by the World Trade Organization (WTO), is woven into
the institutional conditions that confront the individual member
countries. The rules of the WTO are embodied in the national
laws and practices of the individual member countries, and their
existence limits member countries’ maneuvering room in making
choices about their trade policies. Members have considered
themselves bound by the rules and, if dissatis‹ed, could only seek
redress by persuading others to make changes. Thus, each suc-
cessive step in elaborating the norms and rules of the trade
regime has added a new layer to the constraints within which sub-
sequent decisions are made. Through this progressive modi‹-
cation of the existing institutional conditions, advances in trade
cooperation have taken place.

27