Free Trade, Protectionism, and Trade Deficits

Abstract

Milton Friedman was asked to testify before the U.S. Trade Deficit Review Commission in 1999. He wore an Adam Smith necktie to the hearing, which led to the following exchange: SHRINKING TARIFFS, GROWING TRADE The logic of embracing free trade unilaterally , that is, no matter what policy any other national government adopts, is well expressed in an adage attributed to the economist Joan Robinson: Even if your trading partner dumps rocks into his harbor to obstruct arriving cargo ships, you do not make yourself better off by dumping rocks into your own harbor. In a world where few governments heed this logic, apparently because they think that they are giving up something by letting their consumers and businesses buy without artificial obstruction and should get something in return, multinational agreements may offer a face-saving way for governments to lower tariffs and eliminate other trade barriers in concert. The World Trade Organization was established in 1995 to provide a forum for negotiating and enforcing trade treaties covering its more than 150 participating nations. It succeeded a less formal club known as GATT, the General Agreement on Tariffs and Trade. GATT was established in 1947 with twenty-three member nations and expanded its membership over the years. There had been discussion at the Bretton Woods Conference about creating an “international trade organization” to accompany the World Bank and the International Monetary Fund, but the U.S. Congress did not then support the idea.