FREE TRADE’S MISSING LINK. CORCORAN,
A parade of leading politicians, economists and commentators would have us believe U. S. President Donald Trump and his economically ignorant advisers are threatening the very core of globalism, which is allegedly grounded in free- market principles and a free and open international economic system.
If only this were true. There may be a lot of talk of free trade in global circles, but not of free markets.
Even the usually reliable Wall Street Journal has taken to portraying Trump’s tariffs as globe- threatening measures that recall former U. S. president Herbert Hoover’s 1930 approval of the infamous Smoot- Hawley tariffs which, the Journal says, helped create the Great Depression. That’s a stretch.
In a new biography, Hoover: An Extraordinary Life in Extraordinary Times, author Kenneth Whyte reports that the “economic impact of Smoot- Hawley was negligible.” Whyte cites economic historian Douglas Irwin, whose 2011 book on the subject, Peddling Protectionism, concluded that “economic historians do not believe that the Smoot-Hawley tariff played a large role” in creating or extending the Great Depression. The real culprits were bungled monetary policies and financial market chaos.
This is not to suggest that messing with tariffs is good economics. But international trade policy has almost always been grounded in politics rather than economics. Hoover, writes Whyte, supported Smoot- Hawley “for political reasons rather than economic reasons.”
The same could be said of Trump, who is clearly playing to a segment of the U. S. population that believes, as do millions of people around the world, that free trade is a good theory but can be and is being abused by others at the expense of jobs and growth at home.
Canadian trade experts also ridiculed Trump’s tariffs. Former trade negotiator Gordon Ritchie said Canada should retaliate with measures that inflict real damage. So what does Canada plan to do? The Globe and Mail reported Tuesday that Ottawa is looking at imposing its own tariffs on steel and aluminum imports from China. So much for Canada the great free-trading nation: Free trade, but only if necessary.
Trump and his advisers did not invent this political logic, nor can he be held responsible for the fact that free- trade skepticism is internationally and institutionally entrenched. All nations are nominally in favour of free trade, but not free markets.
The conviction that a border open to the importation of cheap cars, steel, cheese and electricity is a threat to national welfare and/or security has been embedded in the global trade system since before the creation of the 1947 General Agreement on Tariffs and Trade ( GATT). The GATT successfully reduced global tariffs and produced a massive expansion of world trade, but it also entrenched the idea that nations need to protect themselves against certain forms of trade.
The 1994 World Trade Organization, successor to the GATT, reflected the same half- baked political conceptual appropriation: The words “free trade” are deployed but without incorporating the full free- market economic context in which trade can be free. The result is a plethora of so-called free-trade deals such as the recent Comprehensive and Progressive Agreement for Trans- Pacific Partnership ( CPTPP), a 1,200- page list of ongoing protectionism and free- trade exceptions signed by Canada and 10 other countries.
The quest for free trade over the last century has never left the political arena and remains mired in lingering nationalist economics and protectionism. National leaders today rarely talk of trade without adding that they are dedicated to “fair trade” rather than free trade.
These political trade realities did not seem to trouble Milton Friedman, one of the 20th century’s most effective proponents of free-trade ideas. His many commentaries and essays spelled out the benefits of open borders, including a popular essay titled “The Case for Free Trade.”
But Friedman tended to gloss over the politics of trade. He argued that the United States and other nations should unilaterally declare free trade. He categorically rejected the claim that such a policy could only be adopted if other nations did the same. “This argument,” said Friedman, “has no validity whatsoever either in principle or in practice. Other countries that impose restrictions on international trade do hurt us. But they also hurt themselves…( I) f we impose restrictions in turn, we simply add to the harm to ourselves and also harm them as well. Competition in masochism and sadism is hardly a prescription for sensible international economic policy!”
That may or may not be sound economics, but it is certainly lousy politics. How does one make that argument to an autoworker or steel worker, or to an average voter, business owner, or politician? Their experience and observation would be that local jobs and incomes are lost when “unfair” imports replace local goods. When there is evidence that foreign nations are “dumping” and subsidizing and protecting their workers, Friedman’s argument carries little weight.
It’s not even clear that Friedman’s economic case is solid. Is it really possible for nations and politicians to turn a blind eye to the fact that — for example — General Motors and Ford have set up auto manufacturing plants in China, in part because of a 25-per-cent Chinese tariff on cars imported from the U. S.? That’s not free trade by a free- market nation, nor does China’s state- subsidized steel industry operate in a free market.
Friedman’s argument has not caught on economically or politically, nationally or internationally, and certainly not in Canada. We now have Ottawa hinting it may go along with a North American automobile- and- steel protection zone. Governments everywhere undermine free markets at home, subsidizing local industries, or paying to create “superclusters.”
A global trade system that doesn’t embrace free markets at the national level cannot be expected to practice international free trade. That’s the missing link in global trade.