Revisiting the 1930s: a pandemic of preferential trade agreements is undermining free trade.

An excerpt from

Termites in the Trading System: How Preferential Trading Agreements Undermine Free Trade by Jagdish Bhagwati (Oxford University Press, 2008).

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As we contemplate the proliferation of Preferential Trade Agreements taking place even prior to the current global financial crisis, it is useful to recall that the preferences in trade that they embody (with trade being freer for member countries than for non-member countries) are not entirely new. Indeed, at other critical times in history, they have been embraced with almost equal passion and have also attracted a strange, if fleeting, approbation from some of the finest minds among economists.

KEYNES DURING WORLD WAR II

Perhaps the most striking historical flirtation with preferences in trade came from the twentieth century's arguably most influential economist, John Maynard Keynes. At the end of the Second World War, the British were skeptical of non-discrimination as implied by the MFN (most-favored nation) clause which would automatically extend to every member country of the proposed trade institution the lowest tariff extended to any member. They also wished to hold on to their Imperial Preference which extended British protection to her colonies and dominions. On the other hand, the Americans, led by Cordell Hull, the Secretary of State from 1933 to 1944 and a recipient of the Nobel Prize for Peace--he believed, not without substance, that free trade would also lead to peace, not just prosperity--vigorously opposed it and favored non-discrimination in the trading arrangements being contemplated after the conclusion of the War. Keynes sided with his own, and made the characteristically flamboyant statement:

"My strong reaction against the word 'discrimination' is the result of my feeling so passionately that our hands must be free ... [T]he word calls up and must call up ... all the old lumber, most-favored-nation clause and all the rest which was a notorious failure and made such a hash of the old world. We know also that it won't work. It is the clutch of the dead, or at least the moribund, hand."

Yet, once they had thought more deeply about the issue, Keynes and other British economists engaged in the negotiations with the United States that led to the final agreement in Proposals for Expansion of World Trade and Employment came to accept Cordell Hull's view that nondiscrimination was a key principle that had to prevail in the proposed new regime for international trade. Keynes, who thought that intellectual inflexibility was a mark of inferior minds, then spoke in the House of Lords what are among his most eloquent words:

"[The proposed policies] aim, above all, at the restoration of multilateral trade ... the basis of the policies before you is against bilateral barter and...