Dreaming Trade or Trading Dreams: The Limits of Trade Blocs
The global trading system post 1945 was founded on the principles of liberal internationalism--multilateralism, non-discrimination, and the economic theory of comparative advantage. At its core, it promised to organize the world's trading system on a non-political basis so that dominant countries could not use political or military power to follow 'beggar-thy- neighbour' policies and gain an advantage over small and medium-sized nations. Instead, the good performance of nations everywhere was thought to depend on unimpeded technology and investment inflows from private investors, converging production costs, an extended hand to developing nations, and a well-managed set of macro-economic policies to ensure that investment flowed to the strategic sectors ( Friedman and Lebard 1991).
To be sure, the reality of the postwar system never fully corresponded with this frictionless vision of the international economy. Despite five decades of liberalized trade, few countries accepted the unqualified logic of efficiency as the principal theoretical foundation of postwar economic expansion. A judicious amount of protectionism enhanced rather than hindered many countries in their race to gain new export markets. Furthermore, the General Agreement on Tariff and Trade's (GATT) success in the postwar world was due in no small part to the fact that much of global trade was excluded from its purview. Services, agriculture, textiles, and intra-firm trade were outside its supervisory powers. It is estimated that by the beginning of the 1990s only a quarter of the world's trade was considered to conform to the precepts of trade liberalization ( Ruigrok 1991). Intra-corporate trade, barter, and bi-lateral 'preferential' trade understandings of all kinds accounted for most international activity. GATT's authority was partial at best and it was only able to establish enforceable benchmarks that states were supposed to follow. Nonetheless, these shortcomings did not prevent the system from working surprisingly well when USA hegemony was unrivalled. Trade expanded dramatically and tariffs fell