33.3 Current Trade Policy

In the remainder of the chapter, we discuss trade policy in practice. We
start with the many international agreements that govern current trade
policies and then look in a little more detail at the NAFTA.

Before 1947, in the absence of any international agreement, any country
was free to impose tariffs on its imports. However, when one country
increased its tariffs, the action often triggered retaliatory actions by its
trading partners. During the Great Depression in the 1930s, widespread
increases in protection occurred as many countries sought to raise their
employment and output by raising its tariffs. The end result was lowered
efficiency, less trade, and a deeper economic decline. Since the end of the
Second World War, much effort has been devoted to reducing tariff
barriers, both on a multilateral and on a regional basis.

The GATT and the WTO

One of the most notable achievements of the post–Second World War era
was the creation in 1947 of the General Agreement on Tariffs and Trade
(GATT). The principle of the GATT was that each member country
agreed not to make unilateral tariff increases. This prevented the outbreak
of “tariff wars” in which countries raised tariffs to protect particular
domestic industries and to retaliate against other countries’ tariff