Is Liberalization Reversible?

• Author: Harold James
• Position: Professor of Modern History at Princeton University and the author of a number of books, including The International Monetary System Since Bretton Woods

On the eve of the millennium, "globalization" has become a catchphrase throughout the world. The nation-state, the driving force of the past two centuries, is dissolving under the pressure of cross-national integration. Despite its many benefits, however, globalization is unsettling, and those who feel most threatened by it may try to turn back the clock.

The most dramatic features of globalization-the liberalization of trade in goods and services and the increasingly unrestricted flow of capital across borders-were by no means inevitable. Indeed, they have surprised many students of political economy, which offers numerous examples of powerful interest groups successfully pushing for policies that restrict trade and depress national incomes.

Free trade has rarely been a popular cause. The history of trade has been full of disappointments, even during the past five decades, a period of remarkable growth for world trade (see chart). The General Agreement on Tariffs and Trade (GATT), which was signed in 1947, was a compromise. It achieved its biggest successes in the early 1960s, largely by reducing its scope to exclude two of the most contentious trade items-textiles and agricultural products. By the 1970s, it was generally agreed that the GATT was moribund. The Tokyo Round of trade negotiations, launched in 1973 by the major trading countries with the intention of achieving substantial tariff cuts, was erratic and protracted, coming to a close in 1979. In the mid-1980s, leading trade experts concluded once again that the GATT was "in a state of breakdown." The Uruguay Round of trade negotiations, which began in 1986, seemed doomed to fail as the European Community and the United States found themselves locked in a politically complex struggle over agricultural pricing and subsidies. As late as 1993, on the eve of the Uruguay Round's conclusion, Patrick Low, a former GATT official, discussed "the weakening of a multilateral approach to trade relations" and "the creeping demise of GATT," and attributed the "GATT's decline" to "the accumulated actions of governments."

Nonetheless, some of the Uruguay Round's achievements were remarkable: principles were extended to intellectual property and trade-related investment; a more complete procedure for conflict resolution was created; and the World Trade Organization (WTO), the GATT's successor, was established in 1995. At the time, many believed that the United States would ignore the WTO and continue to exercise power unilaterally through the application of the Super 301 provision of the U.S. Omnibus Trade and Competitiveness Act of 1988. (Under Super 301, the U.S. administration was required to publish a list of companies engaged in unfair trade practices vis-à-vis the United States, negotiate the elimination of these practices, and take retaliatory action if negotiations failed.) But they were wrong. The United States accepted the WTO's first ruling against it. In 1997, despite widespread skepticism about the possibility of a multilateral agreement on financial services, such an agreement was indeed realized.

Free capital movements, associated in the public's mind with destabilizing speculation and the subversion of important national policy goals, are even less popular than free trade. Although the major industrial countries began, tentatively, to liberalize their capital accounts in the late 1970s, many EC countries did not complete the process until 1990. In the 1990s, a number of developing countries began to liberalize their capital accounts in an effort to attract inflows of foreign capital. Because capital account liberalization raises the serious issue of financial governance, there has been some discussion as to whether the IMF should amend its Articles of Agreement to cover it.

The wisdom of liberalizing trade and capital movements was again called into question when the...