In his commentary, "Competitive Cooperation" written to honor the 50th anniversary of the Treaty of Rome, the 2004 Economics Nobelist Edward C. Prescott reminds the readers of the importance of commerce in mutual economic development and growth.
Let's review some historical facts. With the signing
of the Treaty of Rome in 1957, France, Italy, Belgium, West Germany,
Luxembourg and the Netherlands formed what would eventually become the
European Union. For six decades prior to the treaty, those countries
were about 55% as productive as the U.S. But over the following 25
years, those countries essentially caught up to the U.S. in terms of
When that historic economic treaty was signed, three
countries were roughly on par with those original six -- Denmark,
Ireland and the United Kingdom. However, a funny thing happened in
subsequent years -- those three countries started falling behind their
former peers. So in 1973 they joined the original group and their
economic fortunes improved. It took time, but the U.K. now is as
productive as Germany.
...And what of Latin America? Unfortunately, the region provides a case
study in the perils of protectionism. Recent research by my Minneapolis
Fed colleagues, Lee Ohanian and Jim Schmitz, and two co-authors, shows
that from 1950 to 2001, per capita GDP for Europe increased 68%
relative to the U.S.; Asia increased by 244%, while Latin America
decreased by 21%. This is all the more striking when we realize that
Latin America's per capita GDP actually exceeded Asia's by 75% in 1950.
Perhaps, it is time for a Latin American Union.
Some nations use trade policies to punish others. Whether politically motivated or otherwise, policies that raise barriers to potentially beneficial trade or create trade zones or alliances that exclude others are ultimately doomed to lead
both groups worse off. Of course, the exclusionists, when powerful, come to believe they represent the house with infinite resources in the trade gamble.
Note: In his Getting it Right: Markets and Choices in a Free Society, Robert J. Barro advances points similar to Dr. Prescott's.