Free trade vs protection: Battle still on
The priority given to free trade has generated expectations that are yet to be met, and it needs to be supplemented by other institutional reforms for greater payoffs
The evolution of trade agreements finds its genesis in a series of flip-flops in the trade policies of Europe and the United States which, for over two centuries, were heavily influenced by mercantile economic theory. A favourable balance of trade through tariffs and quotas on imports and thwarting anything that might help a foreign nation to compete with the domestic production of goods were the overarching objectives.
The questioning of this doctrine by Adam Smith gave birth to the “absolute advantage argument for free trade”, igniting the first movement towards liberalised trade. The Reciprocity of Duties Act of 1823 made it permissible for Great Britain to enter into the Cobden-Chevalier Treaty with France in 1860, resulting in significant reciprocal tariff reductions and inclusion of a “most favoured nation” clause (MFN). This Franco-British trade agreement initiated a wave of commercial treaties involving all the main European powers. The inclusion of the MFN clause ensured that concessions were rapidly generalised, and Europe moved swiftly towards free trade.
The first headwinds came with the great depression of 1872, sparking a wave of domestic protection across Europe. In 1879, in Germany, the rye-producing Junkers successfully lobbied for imposition of an “iron and rye” tariff. Italy also instituted a moderate set of tariffs in 1878, with more severe tariffs in 1887. France, in 1892, followed with its Méline tariff, thus effectively ending the period of free trade associated with the Cobden-Chevalier Treaty.
After World War I, nationalist ideologies resulted in a protectionist tide which engulfed the world economy to such an extent that the League of Nations, in an attempt to end the continual raising of customs barriers, organised the first World Economic Conference in May 1927. Twentynine countries, including the main industrialised nations, participated. However, before the initiative could find expression, the onset of the Great Depression of 1929 catalysed a new wave of protectionism. Trade barriers rose. The US Congress, in 1930, passed the notorious SmootHawley Tariff Act which, though designed to protect US jobs, instead led to an international trade war that destroyed millions of jobs worldwide.
It was the economic insecurity and extreme nationalism of the period which created the conditions for the outbreak of World War II. With the US emerging, after World War II, as an economic powerhouse, it wanted to play a dominant role in the global trade arena. Free trade was seen as a “peace movement”, claiming that “unimpeded commerce” is a “civilising wand”. Nations bound by trade are less likely to go to war with each other. Moreover, free trade wasn’t just about economics. It was also central to a broader US foreign policy during the Cold War. Trade agreements helped bind together the major free-market democracies, their growing prosperity serving as an effective counter to the centrally planned economies of the Soviet Bloc and the People’s Republic of China.
The Bretton Woods Conference of 1944, which established the International Monetary Fund and the World Bank, also recognised the need for a comparable international institution for trade.
The mandate to oversee the development of a multilateral trading order was taken up by the General Agreement on Tariffs and Trade (GATT), established in 1947. Though GATT was designed as an all-pervasive agreement for the expansion of multilateral trade, the period that followed saw increasing waves of regional trade agreements. In less than five years after GATT was established, Europe began regional economic integration, commencing with the European Coal and Steel Community in 1951, which eventually became what is now the European Union. A wave of numerous regional trade agreements with Africa, Central and South America saw Europe’s regionalism grow at the expense of multilateralism. In the latter half of the twentieth century, large US industries had come of age and were well integrated into the global value chains, thus becoming dependent on foreign trade. So, American businesses became strong votaries of trade-expanding agreements. Until the 1970s, successive US post-war administrations advocated a single comprehensive global trade accord, and strongly criticised preferential deals limited to a few countries. Europe’s common market and economic union were mostly spared a remonstration by the US because of the broader geopolitical bonhomie.
Realising the global divergence of views, the US pursued its own regional trade negotiations, concluding an agreement with Israel in 1985 and the trilateral North American Free Trade Agreement with Mexico and Canada in the early 1990s. Many other significant regional agreements also took off in West Asia, South America, Africa and the Asia-Pacific.
The World Trade Organisation which in 1995 succeeded GATT as the global supervisor of world trade liberalisation, went further by including policies on services, intellectual property, and investment, whereas the focus of GATT had been primarily reserved for goods. Meanwhile, the concept of “multilateralising regionalism” had also begun to take shape under the umbrella of mega trade negotiations like the US-led Trans Pacific Partnership and the Regional Comprehensive Economic Partnership.
However, in the US, free trade had begun to face a political backlash from a different quarter. Multinational business became the target of an emerging anti-globalisation coalition, joining organised labour and social activists, particularly environmentalists, who saw trade as a force enriching the wealthy at the expense of the environment, the poor, and the US middle class. This growing sentiment subsequently culminated in a very decisive manner in the 2016 US presidential elections.
With the US toning down its advocacy of free trade and resorting to trade protectionism, China may seize this opportunity to not only portray itself as a victim of trade protectionism but don the mantle of the new champion of free trade, further boosting its growing ties with Europe.
The history of international trade may look like a struggle between protectionism and free trade, but the modern world has seen both types of policies grow in tandem. A widely held perception is that the developing countries cling to higher tariffs as an instrument of trade protection, while the developed countries use non-tariff barriers just as effectively to serve the same purpose. Not wanting to leave the impression that trade protection is good for economic growth, the priority afforded to free trade has generated expectations that are yet to be met, and it needs to be supplemented by other institutional reforms for potentially greater payoffs. In the real world, having a clear sense of policy priorities is of utmost importance.
With the US resorting to protectionism, China may seize the opportunity to don the mantle of the new champion of free trade