Chapter 1 Background of International Business & Trade

Introduction
International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its
welfare implications. International trade policy has been highly controversial since the 18th century. International trade
theory and economics itself have developed as a means to evaluate the effects of trade policies. The internet and
technology have made it much easier for businesses of all sizes to profit from the many advantages of international trade.
Going international could provide your business access to a world of opportunities. In this chapter we shall examine the
definition of terms use in international business and trade including their differences. We shall also look at the history of
international trade agreements from mercantilism to trade liberalization and protectionism as well as the Philippines’ position
in international business and trade.

Definition of International Business & International Trade

International Business primarily refers to all the commercial dealings that take place between two or more nations. Any type
of commercial transaction between two or more nations (at an individual, company, or government level) would come under
the category of international business. It is the direct result of growing financial globalization and easing of barriers
(economic and political) between countries.
International Trade refers to transactions that involve the exchange of goods and services between two or more nations.
Such a trade helps nations to expand their markets. Moreover, it also gives countries access to goods and services that is
not available domestically or is available at a higher price. International trade is part of international business

Differences Between International Business & International Trade

The primary difference between international business and international trade is that the former involves all commercial
transactions between countries while the latter only covers goods and services. Despite the differences between the two, it
will not be wrong to use the two terms interchangeably sometimes. This is because international trade is part of international
business. Many a time we have heard people using the terms international trade and international business
interchangeably. Though the two terms are very similar to each other and do mean business beyond borders, but both do
carry different meanings. Therefore anyone and everyone belonging to the commercial world should know and be aware of
the differences between these two terms – international business and international trade. Following are the differences
between these two terms:
 Definition - International business means all monetary dealings between two or more nations. These transactions
could be private and/or between the governments. International trade, on the other hand, only refers to the
exchange of goods and services between two or more nations. Thus in this perspective Business has a larger
coverage as compared to Trade.
 Modes - The mode here means how the transfer of wealth happens between the countries. International business
includes all types of modes. These modes could be import, export, tourism, transportation, direct and portfolio
investment, licensing agreements, intellectual property like trademarks and patents, personnel, franchising
contracts, turnkey operation, and management contracts. In international trade, however, the mode of transaction is
only import and export of goods and services. Here again, the Business has a number of transactional way whereas
Trade has a very limited way of transactions between the two or more countries.
  Objective - The objectives of international business are to expand sales, acquire resources, as well as minimize
risk. In contrast, the objective of international trade is to expand sales volume or find a newer market for the
products.
 Functions - International business involves several types of business, including global manufacturing, managerial,
supply chain, and management. International trade, on the other hand, includes only managerial functions. Global
manufacturing and related functions are not part of the trade.
 Transactions - International business consists of all types of commercial transactions, be it private or government.
These transactions could relate to sales of goods and services, investments, tourism, and more. However, when we
define or refer to International Trade, it is only the transactions of exchange of goods and services.
 Scope - The above discussions tell us clearly that the scope of international business is much wider and larger than
international trade. We can say the other way that factually speaking international trade is part of international
business.

Potential Advantages of International Trade

1. Increased revenues - One of the top advantages of international trade is that you may be able to increase your
number of potential clients. Each country you add to your list can open up a new pathway to business growth and
increased revenues. The 2016 FedEx Trade Index, a national survey of 1,004 small business leaders conducted by
Morning Consult, shows that business leaders engaged in global trade say they're growing faster and hiring more
employees than small businesses who stay local. “Sixty-five percent of small businesses that trade say their
revenue is increasing versus 46 percent of small businesses that do not trade," the report said. "Small businesses
that trade are also 20 percent more likely to say they are hiring more employees." (Respondents included business
owners and executive at companies with between two and 500 employees.)
2. Decreased competition - Your product and services may have to compete in a crowded market domestically, but
you may find that you have less competition in other countries.
3. Longer product lifespan - Sales can dip for certain products domestically as customers stop buying them or move to
upgraded versions over time. Focusing only on the domestic market may expose you to increased risk from
downturns in the economy, political factors, environmental events and other risk factors. Selling a product to an
overseas market can extend the life of an existing product as emerging markets seek to buy local products.
4. Easier cash-flow management - Getting paid upfront may be one of the hidden advantages of international trade.
When trading internationally, it may be a general practice to ask for payment upfront, whereas at home you may
have to be more creative in managing cash flow while waiting to be paid. Expanding your business overseas could
help you manage cash flow better.
5. Better risk management - One of the significant advantages of international trade is market diversification. Focusing
only on the domestic market may expose you to increased risk from downturns in the economy, political factors,
environmental events and other risk factors. Becoming less dependent on a single market may help you mitigate
potential risks in your core market.
6. Benefiting from currency exchange - Those who add international trade to their portfolio may also benefit from
currency fluctuations. For example, when the U.S. dollar is down, you may be able to export more as foreign
customers benefit from the favorable currency exchange rate. You can also benefit from currency conversion. Let's
say you do business in Japan and the Japanese yen is strong against the U.S. dollar. Your company's profits from
Japan will be in yen. When you convert the payments in yen against a weak dollar, that means more dollars for your
American head office—a welcome boost to your bottom line. This alone could be one of the most valuable
advantages of international trade.
7. Access to export financing - Another one of the advantages of international trade is that you may be able to
leverage export financing. The Export-Import Bank of the United States (EXIM) and The U.S. Small Business
Administration may be places to explore for export financing options.
8. Disposal of surplus goods - One of the advantages of international trade is that you may have an outlet to dispose
of surplus goods that you're unable to sell in your home market.
 9. Enhanced reputation - Doing business in other countries can boost your company's reputation. Successes in one
country can influence success in other adjacent countries, which can raise your company's profile in your market
niche. It can also help increase your company's credibility, both abroad and at home. This is one of the advantages
of international trade that may be difficult to quantify and, therefore, easy to ignore.
10. Opportunity to specialize - International markets can open up avenues for a new line of service or products. It can
also give you an opportunity to specialize in a different area to serve that market. Being exposed to the realities of
the world outside your home base may even spark innovations, upgrades and efficiencies for your products and
services. We never know what happens when we open our minds to ideas, feedback and experiences that come
from outside the boundaries of our own country.

Philippines’ Current Position in International Business & Trade

 Overview: According to the Observatory of Economic Complexity (OEC), In August 2021 the Philippines exported
$6.54B and imported $10.6B, resulting in a negative trade balance of $4.05B. Between August 2020 and August
2021 the exports of Philippines have increased by $1.04B (19%) from $5.5B to $6.54B, while imports increased by
$2.8B (35.9%) from $7.8B to $10.6B.

 Trade: In August 2021, the top exports of Philippines were Integrated Circuits ($1.54B), Commodities not
elsewhere specified ($818M), Computers ($298M), Insulated Wire ($241M), and Industrial Printers ($237M). In
August 2021 the top imports of Philippines were Commodities not elsewhere specified ($1.17B), Refined Petroleum
($852M), Integrated Circuits ($706M), Wheat ($240M), and Coal Briquettes ($238M).

 Destinations: In August 2021, Philippines exported mostly to China ($1.06B), United States ($1.04B), Japan
($952M), Hong Kong ($931M), and Singapore ($393M), and imported mostly from China ($2.48B), Japan ($984M),
South Korea ($819M), United States ($691M), and Thailand ($680M).

 Growth: In August 2021, the increase in Philippines's year-by-year exports was explained primarily by an increase
in exports to Hong Kong ($165M or 25.5%), United States ($108M or 12.9%), and South Korea ($78.5M or 38.2%).
In August 2021, the increase in Philippines's year-by-year imports was explained primarily by an increase in imports
from China ($369M or 17.2%), Kuwait ($130M or 445k%), and Singapore ($108M or 23.2%), and product imports
increase in Refined Petroleum ($223M or 69.8%), Office Machine Parts ($99.5M or 64.7%), and Delivery Trucks
($59.4M or 40.5%).

 Gross Domestic Product: According to the US International Trade Administration, the Philippines’ gross domestic
product (GDP) contracted by 9.6% in 2020 - its worst economic performance in the post-war period and the biggest
contraction in ASEAN. Before the COVID-19 crisis, the Philippine economy was one of the world’s best performers,
with an average growth rate of 6.6% from 2012 to 2019. Amidst the economic recession, the Philippines’ GDP per
capita fell to $3,430 in 2020 from $3,850 in 2019 - delaying the government’s target to attain upper middle-income
status within an income range of $4,096 to $12,695. Consumer spending, which comprises over two thirds of the
economy, fell 7.2% in 2020 due to community lockdown measures implemented in varying degrees to contain
COVID-19. The global pandemic marginally affected the remittances from more than ten million Filipino migrants
and overseas workers (down 0.8%), which historically support domestic consumption and anchor economic growth.
The Philippine economy grew by 11.8 percent in the second quarter of 2021, exiting a five-quarter pandemic-
induced recession. Analysts attribute the quarterly growth to “base effects,” due to the 17 percent GDP contraction
during last year’s strictest COVID-19 lockdown. Prospects for a strong rebound in the second half of 2021 will be
moderated by Metro Manila’s return to the highest quarantine level in August to stem the spread of the COVID-19
Delta variant. Reflecting challenges in easing mobility restrictions and fully reopening the economy, the
government reduced its GDP growth target to 6% to 7% for the full year, from the previous 6.5% to 7.5%. With the
government targeting a 70% COIVID immunization rate by year’s end, officials remain hopeful of a gradual
economic recovery in the second half of the year and a return to pre-pandemic economic growth rates by late-2022.
Several multilateral organizations and think tanks already downgraded their 2021 economic forecasts for the
 Philippines, anticipating that the country to be a laggard in Asia due to a slow-rolling COVID-19 mass vaccination
campaign and relatively limited fiscal response. Notwithstanding, they agree that the Philippines still has solid
macroeconomic fundamentals, characterized by manageable external debt, a healthy public balance sheet, and a
huge foreign currency buffer, which can sufficiently support the country’s post-pandemic economic recovery.

 Inflation Rate: Consumer price inflation averaged 2.6% in 2020, slightly higher than 2.5% in 2019 but remaining
well-within the government’s 2% to 4% target band for 2020-2021. Favorable inflation dynamics during the year
enabled the Central Bank to successively cut policy interest rates to maintain financial stability and support the
economy during the COVID-19 crisis. In 2020, the Central Bank cut interest rates by a total of 200 basis points,
bringing overnight repurchase rate, overnight deposit, and lending rates to record low levels at 2%, 1.5%, and 2.5%,
respectively. The reserve requirements ratio for commercial banks was also reduced by 200 basis points to 12%,
with a pledge to bring it down to a single digit by 2023. From January to June 2021, the inflation rate spiked to 4.4%
from 2.5% in the same period in 2020. A higher food inflation rate, driven by increased prices of pork due to the
impact of the ongoing African Swine Fever (ASF) epidemic, stoked concerns on the affordability of food during an
economic and health crisis, especially for poor communities disproportionately affected by the pandemic and
already enduring involuntary hunger. To augment the domestic supply of pork, the government increased the
minimum access volume and trimmed the tariff rates for imported pork products for one year. It also cut the most-
favored nation in-quota tariff rates for rice to 35% from 40%, partly to minimize any potential upward pressures on
inflation. Since liberalizing the rice market in 2019 (Rice Tariffication Law), the Philippines has achieved significant
success in keeping its rice prices low and stable. Despite higher inflation expectations, the Central Bank sees prices
remaining manageable and settling near the high-end of their 2% to 4% target range. The Central Bank has since
paused on monetary easing but has expressed determination to maintain an accommodative monetary policy
stance, with real interest rates in the negative territory, until economic recovery from the COVID-19 crisis gathers
momentum.

 Balance of Payments: The balance of payments (BOP) registered a $16 billion surplus in 2020, more than twice
the $7.8 billion surplus in 2019. The current account surplus amounted to $13 billion, a turnaround from four
consecutive years of deficit, boosting the BOP position. From 2016 to 2019, the Philippines recorded a current
account deficit due to a wider trade gap amidst aggressive capital importation for the government’s flagship Build,
Build, Build infrastructure program. In 2020, however, the trade deficit narrowed by 35.4% amidst subdued global
and domestic demand and lower public spending for infrastructure. Imports of goods declined by 22.9% during the
year, as capital imports fell over 20%, while exports of goods contracted by 11.3%. Exports of services - driven
mainly by the business process outsourcing (BPO) industry, grew marginally by 0.3% ($13 billion); while net
receipts from primary and secondary income accounts contracted due to the impact of worldwide COVID-19
lockdowns on overseas Filipino workers’ income, remittances, and other current account transfers. Meanwhile, net
receipts from the capital account declined by 50% to $63 million from $127 million the previous year. The financial
account recorded net inflows of $4.6 billion in 2020, 42% lower than the $8 billion registered in 2019. The portfolio
investment account recorded net outflows of $502 million in 2020, as residents invested more in portfolio assets
abroad compared to foreign portfolio investment inflows to the country. The Philippines’ stock market fell 8.7% in
2020, reflecting predominantly bearish sentiments among foreign investors. The local currency (LCY) bond market,
on the other hand, grew by 28.9% during the year, with $178.4 billion in outstanding debt securities. Government
and corporate bonds comprised 81.2% and 18.8% of the LCY bond market. Meanwhile, the direct investment
account declined by 43% due to lower foreign direct investments (down 24.6% to S$6.5 billion) and higher
residents’ investments abroad (up 5.2% to $3.5 billion).

 Foreign Direct Investments: Net foreign direct investment (FDI) inflows, which started to slide in 2018 continued
their downward trend, decreasing by 24.6% year-on-year to $6.5 billion in 2020. The Philippines lags similarly sized
and ranked ASEAN neighbors in attracting FDI. The United States — with an estimated $6.9 billion (FDI stock) in
 2019, a 0.3% increase from 2018— ranks among the Philippines’ top investors. The Philippines slipped in terms of
global competitiveness in 2019 after successively registering overall improvements in various competitiveness
rankings over the past seven to eight years, with inadequate physical and digital infrastructure the main drivers for
the decline. Investors also repeatedly cite government red tape, regulatory uncertainties, a slow judicial system,
inconsistent application of laws by Local Government Units (LGUs), and corruption as challenges to doing business
in the country. Meanwhile, the passage of the Corporate Recovery and Tax Incentives for Enterprises Act
(CREATE) in March 2021 as part of the Comprehensive Tax Reform Program (CTRP) is expected to lure $4 billion
in new investments in the next three years but is also estimated to erode government revenues by up to $10 billion
in the next five years. CREATE, deemed a pillar in the government’s COVID-19 response, cuts the corporate
income tax rate to 25% for large enterprises and 20% for micro, small, and medium enterprises, from the current
30%, in exchange for rationalization of fiscal incentives.

 Fiscal Administration: The national government’s fiscal deficit-to-GDP ratio increased to 7.6% in 2020 from 3.4% in
2019. Public expenditures expanded by 11.3% to $86 billion during the year, equivalent to 23.6% of GDP. The
government disbursed $11.5 billion in COVID-19-related spending in 2020 to mitigate the pandemic’s livelihood
impacts, including through two rounds of economic stimulus laws. Due to budget realignments to COVID-19 and
lockdown restrictions, infrastructure spending declined by 22% to $14 billion - equivalent to 4.8% of GDP.
Notwithstanding, public infrastructure spending remained at an all-time high (annual average of 5.1% of GDP)
under the current administration. Meanwhile, government revenues fell by 9% in 2020 amidst depressed economic
activities dragged by a decline in tax collections (down 11.4%) and lower overall tax effort (down 13.9% from
14.5%). Nevertheless, the fiscal reforms adopted by the administration in the previous years, including revenue-
generating measures under the CTRP have given the government enough fiscal space to address the COVID-19
pandemic.

 Banking & Credit: The Philippine Central Bank’s gross international reserves (GIR) stood at $110.1 billion as of the
end-December 2020, up from $87.8 billion in reserves a year ago. As of May 2021, GIR remained high at $107.3
billion. The latest GIR level represents an ample external liquidity buffer, equivalent to 12.2 months’ worth of imports
of goods and services and payments of primary income and about 7.8 times the country’s external debt based on
original maturity and 5.2 times based on residual maturity. Credit rating agencies Moody’s, Standard & Poor’s
(S&P), and Fitch Ratings recently affirmed the Philippines’ investment grade credit rating, although Fitch revised its
outlook to “negative,” from “stable,” which forecasts a credit downgrade is possible over the near-term. Fitch flagged
the country’s deteriorating fiscal position due to the COVID-19 pandemic, but cited modest government debt relative
to peers, ample international reserves, and still solid economic growth prospects despite the pandemic. In 2020,
when many countries faced credit downgrades due to COVID-19’s fiscal strains, the Japan Credit Rating Agency
(JCRA) upgraded the Philippines to the government’s target “A-” credit rating. S&P has assigned a “BBB+” rating
since April 2019, two notches above the minimum investment grade and just below the “A” scale. Ratings from Fitch
(“BBB”) and Moody’s (“Baa2”), meanwhile, are two steps below this government target.

 Unemployment Rate: The unemployment rate hit 10.3% in 2020 from 5.1% in 2019, translating to 4.5 million
unemployed – the highest since 2005. During the height of the coronavirus lockdown in April 2020, the
unemployment rate rose to a record high of 17.6% (7.3 million unemployed). The labor force participation rate
declined to 59.5% in 2020 from 61.3% a year ago, while the underemployment rate increased to 16.2% from 13.8%.
Over 600,000 Overseas Filipino Workers (OFWs) have returned to the Philippines since May 2020. Labor market
conditions gradually improved alongside the easing of community quarantine restrictions, with 7.7% of the labor
force (3.7 million) remaining unemployed as of May 2021. With a target to inoculate 70 million (the adult population)
by end-2021, the government has expressed confidence in reviving businesses and improving job generation
through 2022. Meanwhile, the World Bank estimated that 2.7 million more Filipinos may have sunk into poverty in
2020, equivalent to 22.6% in the poverty incidence rate. Before the COVID-19 crisis, the poverty incidence was
down to 16.6% in the latest 2018 survey from 23.3% in 2015, and studies had shown the middle class is expanding.
 However, the high level of income inequality remains a challenge, with poverty incidence significantly varying
across regions.

 Political Stability: The political situation in the Philippines is stable. Elected in 2016 for a single six-year term,
President Rodrigo Duterte has sustained historically high approval ratings. There will be an election in May 2022 to
determine his successor. Since 2016, the Duterte Administration has not implemented any major restructuring or
intervention in the economy, and the Philippines experienced continued economic growth until it was significantly
impacted by the COVID-19 pandemic and subsequent lockdowns in 2020. In 2020, the Duterte Administration relied
primarily upon business closures, and travel and social distancing restrictions to contain the spread of the virus,
which has consequently negatively impacted many sectors of the economy.

 Justice, Peace & Order: The Philippine government is challenged by a lack of due process, checks and balances,
systemic corruption, weak oversight and regulatory institutions, and an overburdened criminal justice system known
for slow court procedures. The national government has launched a crackdown on crime and illegal drugs that has
drawn criticism from both the international community and human rights groups for violating civil liberties and led to
the opening of an investigation by the International Criminal Court in 2021 into whether the campaign constitutes a
crime against humanity. Terrorist groups occasionally attack civilian targets, kidnap civilians – including foreigners –
for ransom, and engage in armed attacks against government security forces. These groups have typically carried
out their activities in the western and central regions of Mindanao, including the Sulu Archipelago and Sulu Sea.
Although both Islamic State-East Asia affiliated terrorist groups and the Communist Party of the Philippines-New
People’s Army (CPP-NPA) are capable of conducting operations outside of the rural, southern Philippines, these
attacks are rare in the more populous, urbanized northern areas of Luzon which is home to more than half the
country’s population and over two-thirds of GDP in 2020. The national government is attempting to end one of the
longest-running militant insurgencies in Southeast Asia through a peace process with the Moro Islamic Liberation
Front (MILF) which resulted in the creation of the Bangsamoro Autonomous Region in Muslim Mindanao in 2019.

 Philippine Trade Relations: U.S.-Philippines bilateral trade declined by 11.4% year-on-year to $18.9 billion in 2020
due to the lockdown that restricted mobility of people and hampered the shipment of goods in and out of the
country. However, bilateral trade has grown by almost 23% since 2010. In 2020, the Philippines ranked as the 30th
largest export destination for U.S. products and the 28th largest source of U.S. merchandise imports. The U.S.
trade deficit with the Philippines was at $3.4 billion in 2020. The United States was the Philippines’ third largest
country supplier in 2020, with a 7.71% share of the country’s imports. The top two import sources of the Philippines
were China and Japan, with 23.23% and 9.59% import share, respectively. The United States was a very close
second to Japan as an export market of the Philippines, with 15.36% of total export value in 2020. Japan accounted
for 15.39%.

A Brief History of International Trade Agreements

Ever since Adam Smith extolled the virtues of the division of labor and David Ricardo explained the comparative advantage
of trading with other nations, the modern world has become increasingly more economically integrated. International trade
has expanded, and trade agreements have increased in complexity. While the trend over the last few hundred years has
been toward greater openness and liberalized trade, the path has not always been straight. Since the inauguration of the
General Agreement on Tariffs and Trade (GATT), there has been a dual trend of increasing multilateral trade agreements,
those between three or more nations, as well as more local, regional trade arrangements.
 From Mercantilism to Multilateral Trade Liberalization - The doctrine of mercantilism dominated the trade policies of
the major European powers for most of the sixteenth century through to the end of the 18th century. The key
objective of trade, according to the mercantilists, was to obtain a “favorable” balance of trade, by which the value of
one’s exports should exceed the value of one’s imports. The mercantilist trade policy discouraged trade agreements
 between nations. That's because governments assisted local industry through the use of tariffs and quotas on
imports, as well as the prohibition of exporting tools, capital equipment, skilled labor or anything that might help
foreign nations compete with the domestic production of manufactured goods.
One of the best examples of a mercantilist trade policy during this time was the British Navigation Act of 1651.
Foreign ships were prohibited from taking part in coastal trade in England, and all imports from continental Europe
were required to be carried by either British ships or ships that were registered in the country where the goods were
produced.
The whole doctrine of mercantilism would come under attack through the writings of both Adam Smith and David
Ricardo, both of whom stressed the desirability of imports and stated that exports were just the necessary cost of
acquiring them. Their theories gained increasing influence and helped to ignite a trend towards more liberalized
trade — a trend that would be led by Great Britain.
In 1823, the Reciprocity of Duties Act was passed, which greatly aided the British carry trade and made permissible
the reciprocal removal of import duties under bilateral trade agreements with other nations. In 1846, the Corn Laws,
which had levied restrictions on grain imports, were repealed, and by 1850, most protectionist policies on British
imports had been dropped. Further, the Cobden-Chevalier Treaty between Britain and France enacted significant
reciprocal tariff reductions. It also included a most favored nation clause (MFN), a non-discriminatory policy that
requires countries to treat all other countries the same when it comes to trade. This treaty helped spark a number of
MFN treaties throughout the rest of Europe, initiating the growth of multilateral trade liberalization, or free trade.
 The Deterioration of Multilateral Trade - The trend toward more liberalized multilateral trading would soon begin to
slow by the late 19th century with the world economy falling into a severe depression in 1873. Lasting until 1877,
the depression served to increase pressure for greater domestic protection and dampen any previous momentum to
access foreign markets. Italy would institute a moderate set of tariffs in 1878 with more severe tariffs to follow in
1887. In 1879, Germany would revert to more protectionist policies with its "iron and rye" tariff, and France would
follow with its Méline tariff of 1892. Only Great Britain, out of all the major Western European powers, maintained its
adherence to free-trade policies.
As for the U.S., the country never took part in the trade liberalization that had been sweeping across Europe during
the first half of the 19th century. But during the latter half of the century, protectionism significantly increased with
the raising of duties during the Civil War and then the ultra-protectionist McKinley Tariff Act of 1890.
All of these protectionist measures, however, were mild compared to the earlier mercantilist period and in spite of
the anti-free trade environment, including a number of isolated trade wars, international trade flows continued to
grow. But if international trade continued to expand despite numerous hurdles, World War I would prove to be fatal
for the trade liberalization that had begun in the early 19th century.
The rise of nationalist ideologies and dismal economic conditions following the war served to disrupt world trade
and dismantle the trading networks that had characterized the previous century. The new wave of protectionist
trade barriers moved the newly formed League of Nations to organize the First World Economic Conference in 1927
in order to outline a multilateral trade agreement. Yet, the agreement would have little effect as the onset of the
Great Depression initiated a new wave of protectionism. The economic insecurity and extreme nationalism of the
period created the conditions for the outbreak of World War II.
 Multilateral Regionalism - With the U.S. and Britain emerging from World War II as the two great economic
superpowers, the two countries felt the need to engineer a plan for a more cooperative and open international
system. The International Monetary Fund (IMF), World Bank, and International Trade Organization (ITO) arose out
of the 1944 Bretton Woods Agreement. While the IMF and World Bank would play pivotal roles in the new
international framework, the ITO failed to materialize. Its plan to oversee the development of a non-preferential
multilateral trading order would be taken up by the GATT, established in 1947. While the GATT was designed to
 encourage the reduction of tariffs among member nations, and thereby provide a foundation for the expansion of
multilateral trade, the period that followed saw increasing waves of more regional trade agreements. In less than
five years after the GATT was established, Europe would begin a program of regional economic integration through
the creation of the European Coal and Steel Community in 1951, which would eventually evolve into what we know
today as the European Union (EU).
Serving to spark numerous other regional trade agreements in Africa, the Caribbean, Central and South America,
Europe’s regionalism also helped push the GATT agenda forward as other countries looked for further tariff
reductions to compete with the preferential trade that European partnership engendered. Thus, regionalism did not
necessarily grow at the expense of multilateralism, but in conjunction with it. The push for regionalism was likely
due to a growing need for countries to go beyond the GATT provisions, and at a much quicker pace.
Following the breakup of the Soviet Union, the EU pushed to form trade agreements with some Central and Eastern
European nations, and in the mid-1990s, it established some bilateral trade agreements with Middle Eastern
countries. The U.S. also pursued its own trade negotiations, forming an agreement with Israel in 1985, as well as
the trilateral North American Free Trade Agreement (NAFTA) with Mexico and Canada in the early 1990s. Many
other significant regional agreements also took off in South America, Africa and Asia.
In 1995, the World Trade Organization (WTO) succeeded the GATT as the global supervisor of world trade
liberalization, following the Uruguay Round of trade negotiations. Whereas the focus of GATT had been primarily
reserved for goods, the WTO went much further by including policies on services, intellectual property and
investment. The WTO had over 145 members by the early 21st century, with China joining in 2001.
While the WTO seeks to extend the multilateral trade initiatives of the GATT, recent trade negotiations appear to be
ushering in a stage of “multi-lateralizing regionalism.” The Transatlantic Trade and Investment Partnership (TTIP),
the Transpacific Partnership (TPP), and the Regional Cooperation in Asia and the Pacific (RCEP) comprise a
significant portion of global GDP and world trade, suggesting that regionalism may be evolving into a broader, more
multilateral framework.
 The Bottom Line - The history of international trade may look like a struggle between protectionism & free trade,
but the modern context is currently allowing both types of policies to grow in tandem. Indeed, the choice between
free trade & protectionism may be a false choice. Advanced nations are realizing that economic growth and stability
depend on a strategic mix of trade policies.