The Beginning of the End of Free Trade?

While some might argue otherwise, support for the notion of "free trade" has traditionally been something of a "bull market" phenomenon.

Generally speaking, when things are going swimmingly, people are more open to letting others grab their share of the pie. However, when circumstances turn for the worse, everyone feels the need to fight for every little scrap. Invariably, those based in other countries are the first to bear the brunt of that pressure.

Interestingly, despite the fact that global economic and financial condtions have, up until recently at least, been seen as relatively buoyant, attitudes regarding cross-border commerce have grown increasingly antagonistic.

In "The End of Free Trade," Washington Post Op-Ed Columnist Robert J. Samuelson offers his insights on the current state of affairs.

Here's today quiz. What do the following have in common: (a) Vladimir Putin; (b) China's currency, the renminbi; (c) the U.S.-Peru trade agreement; and (d) Hugo Chávez? Answer: They all reflect the "new mercantilism." It's an ominous development affecting the world economy. Even as countries become more economically interdependent, they're also growing more nationalistic. They're adopting policies intended to advance their own economic and political interests at other countries' expense. As practiced until the mid-19th century, mercantilism aimed to do just that.

It was an economic philosophy that favored large trade surpluses. At the time, this had some logic. Trade was an adjunct to military power. Exports earned gold and silver coin, which financed armies and navies. But mercantilism fell into disfavor as a way to promote national prosperity. Free trade, argued Adam Smith and David Ricardo, would benefit all countries, because each would specialize in what it did best -- the doctrine of "comparative advantage." The post-World War II economic order took free trade as its ideal, even though trade barriers were lifted slowly. Now mercantilism is making a comeback, as governments try to manipulate markets to their advantage.

The undervalued renminbi is a glaring example. China's leaders have staked their country's political stability on export-led job creation driven by an artificially cheap currency that puts competitors -- Mexico, India and other developing countries as well as the United States and Europe -- at a disadvantage. China's trade surpluses have swelled. In 2007, the current account -- a broad trade balance -- will register a $400 billion surplus, about 12 percent of gross domestic product, says economist Nicholas Lardy of the Peterson Institute. That's up from $21 billion, or 1.7 percent of GDP, in 2000. As a share of GDP, China's current account surplus is "triple Japan's level in the 1980s when Japan-bashing was at its peak."

Mercantilist notions also affect the energy trade. "A bear at the throat" is how the Economist recently described Europe's reliance on Russia for about a quarter of its natural gas. Putin talks of a gas cartel, and Europeans fear that their dependence exposes them to political blackmail. Chávez is already less subtle. He dispenses Venezuela's oil to Cuba and other friendly countries at discounted prices. The specter is that scarce energy supplies, now available to all on commercial terms, will be increasingly allocated by political commitments.

Finally, the retreat from global trade agreements also reflects the new mercantilism. The Doha round of worldwide trade talks is floundering. Countries feel more comfortable with nation-to-nation and regional trade agreements, where they have more control over the terms. The World Trade Organization counts about 400 such agreements; the U.S.-Peru pact is the latest.

The paradox is that as the Internet and multinational companies strengthen globalization, its political foundations are weakening. Of course, opposition is not new. Even if free trade benefits most countries, some firms and workers lose from added competition. But for most of the postwar era, a pro-trade consensus neutralized this opposition. That consensus is now fraying.

Two powerful forces had shaped it, notes Harvard political scientist Jeffry Frieden. First was the belief that protectionism worsened the Great Depression. Everyone wanted to avoid a repetition of that tragedy. The second was the Cold War. Trade was seen as a way of combating communism by promoting the West's mutual prosperity. Both ideas bolstered political support for free trade. For years the global trading system flourished on the inertia of these impulses, whose relevance has faded.

In a booming world economy, the resulting tensions have so far remained muted. China's discriminatory trade practices, for example, have excited angry rhetoric, but not much else. The Chinese have generally deflected protests by, among other things, announcing large import orders at crucial moments. When European officials recently visited, there was a placating order for 160 Airbus planes worth an estimated $15 billion.

But would a global slowdown change that if other countries blamed Chinese exports for destroying their domestic jobs? Would import quotas or tariffs follow? Already, China has turned from the world's largest steel importer to the largest exporter, says Lardy. In the United States, the present pattern of global trade is viewed with increasing hostility: U.S. deficits are seen as eroding industrial jobs while providing surplus countries with the dollars to buy large pieces of American firms.

The world economic order depends on a shared sense that most nations benefit. The more some countries pursue narrow advantage, the more others will follow suit. "What's the glue that holds all this together?" asks Frieden. "Is there a common agreement about cooperation that allows governments to give up something to maintain the international order?" It's an open question whether these conflicting forces -- growing economic interdependence and rising nationalism -- can coexist uneasily or are on a collision course.

Comments

[Edward Charles Ponzi Jr.]

"First was the belief that protectionism worsened the Great Depression"

Michael -- what's your view on that?

[Michael Panzner]

Yes, it did. And I believe that protectionism will worsen the next depression.

[Lady from Middle America]

This post just shows how dangerous all of this talk can be. I know as well as anyone else that we are better off without protectionism. However, people like me are also concerned about jobs that are being lost to lower-paid guest workers or are being offshored for good.

If we voice our concerns, the "experts" pat our heads, tell us not to worry, and start lecturing us about Ricardian theories of comparative advantage. People who start screaming for Mexican border walls and prohibitive trade barriers and tariffs tend to get a little more attention. I just worry that if some of the basic needs of American workers are not met (e.g., having a job), the electorate could grab onto some of these simplistic protectionistic ideas, and as Michael says, could worsen the next depression.

[Pat R.]

I agree that protectionism is not good, it always costs the consumer more money, but, things should be level. We shoot ourselves in the foot with an income tax, and would be better served with a sales tax. All products would be taxed the same, no matter where it was made. Our trade policy should be a mirror, whatever your country places as subsidies or tariffs, that is what we have as our policy. Thank you.