Economics

3 Pages 746 Words

Ever since Adam Smith published Wealth of Nations in 1776, it has become increasingly evident that relaxing trade barriers generally raises the wealth of the nations involved. As Smith noted, "If a foreign country can supply us with a commodity cheaper than we ourselves can make, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage". Others such as Torrens, Ricardo, and Mill further explained this comparative advantage, showing in detail how that, if a certain product is available at a lower cost from another country, the resources used locally can be transferred to other products for which the domestic country has an advantage in producing. Any restraints on imports or exports prevent resources from being used efficiently, thus hurting the country using such a trade barriers.
Since the time of these economic philosophers, the amount of trade protection between countries has risen and fallen for a variety of reasons. Although it has been evident for quite some time that multilateral trade liberalization would benefit all countries involved, it was not until 1947 that the General Agreement on Tariffs and Trade (GATT) was created to facilitate the reduction of trade barriers. Besides setting an upper limit on trade restrictions, it introduced the somewhat mis-named Most-Favored Nation (MFN) Clause (Article I), which states that countries may not play favorites; once they lower an import tariff for products from one country, they must lower the tariffs for all countries participating in GATT.
At first glance Article XIX might seem quite peculiar; after all, the very essence of the concept of comparative advantage is that some countries can produce products at a lower price than others. The entire motivation of GATT is to lower trade restrictions so that this comparative advantage can be realized, prices will be lowered, and domestic resources will be transferred to are...