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Is global free trade dead?

July 18, 2018

Since helping shape the General Agreement on Trade and Tariffs (GATT) in 1948, the World Trade Organization's forerunner, the US has been at the forefront of trade liberalization. That era appears to be ending.

Anti-Trump protest in Edinburgh
Image: Reuters/A. Yates

For economist Fred Bergsten and his 'bicycle theory,' trade policy is intrinsically unstable because it tends towards either liberalization or protectionism. To not fall off the bike (protectionism), he believes, multilateral trade negotiations must constantly pedal towards greater liberalization. 

So, as the EU's top brass signed the single market's biggest trade deal ever, with Japan, this week, creating an open trading zone covering nearly a third of the world's GDP, the question is — can the EU and other advocates of global free trade keep pedaling hard enough when the US appears intent on crashing the bike?

Read moreEU, China seek closer ties as US turns against trade

EU Trade Commissioner Cecilia Maelstrom certainly thinks so. "The EU-Japan deal will send a strong signal to the world against US protectionism," she said on Tuesday, just days after US President Donald Trump had characterized the EU as "a foe."

Tectonic plates shifting 

But others are less sure. "For the first time since World War II, those arguing to remove barriers to trade are on the defensive in Europe. The ghost of protectionism haunts the continent," Pieter Cleppe, head of think tank Open Europe in Brussels, told DW. 

"In advanced economies across the globe, expanded trade and globalization face an existential crisis: for large swathes of the European and American electorate, the current trade model is non-representative, undemocratic, and perceived — often justly — as contrary to their economic interests," he added.

Others point to huge labor supply shocks after China, India and the countries of the former Warsaw Pact entered the global labor market, while automation has pitted unskilled labor against technology. Added to this, the elimination of capital controls has allowed capital to move rapidly around the globe and facilitated new investment abroad rather than at home.

"For decades, arrogant economic elites have told voters and communities negatively impacted by free trade deals that they simply failed to appreciate the benefits of the global economy. They failed to forecast the predictable backlash by those unwilling to accept low wages and the loss of factory jobs as a fair price to pay for the benefits of free trade," Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, told the US news media outlet Politico

"Those of us who recognize these social costs and yet still value globalization must introduce a new model, or yield to the atavism of Trump and Brexit," he added.

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Trump as symptom

So, in this sense Trump is more symptom than cause.

And others have gone further, with some brave souls even suggesting Trump — horror of horrors — may have a point on trade and also about China, for example. 

Beijing's admission into the WTO was based on the assumption that China would continue market reforms, an area that has become muddied, at least while Beijing uses indirect subsidies to bollster quasi-private companies and exchange rates to further its export-based growth strategy. The US clearly did not foresee China assuming this neo-mercantilist trade and investment approach.

In relation to the EU, the situation is also up for discussion in ways it hasn't been for some time. "To avoid a trade war, the EU should take up Trump's suggestion to cut its own import tariffs on cars at least to the level of the US," Cleppe says.

"Germany seems to want this but France is resisting. Current EU countermeasures are risky, won't convince Trump and are hitting EU consumers," he adds. 

What is capitalism?

Free trade but only when it suits

"Ask not if 'free' trade is dead; ask if it ever lived," Peter Chase, a senior fellow at the German Marshall Fund, told DW. 

Conventional thinking — that overrated notion — might have it that since the advantages of free trade were first expounded by Scottish economist Adam Smith in 1776, the idea of comparative advantage has dominated economic thinking. That is, the idea that what is good for me could also be good for you, that through trade both our needs will be met. Not the mercantilist winner-takes-all view, the zero sum Trumpian vision.

But might that be to believe in the power of wishful thinking?

"Nation states are and remain sovereign," Chase continued.

"They set the rules for all goods sold in their territory and determine the taxes foreign products must pay for the privilege. No foreign trader or investor ever has 'free' access to another country. What we misleadingly call 'free' trade today is the decision of two or more countries to agree to freer trade between them. But even here foreign products and investors must still obey domestic laws. No government ever yields this sovereign power," Chase said.

Infografik wichtige Handelsabkommen weltweit EN

The US and UK, often considered the bastions of free trade, have used protectionism to varying degrees over the years. Britain reduced protectionism for manufactures in the mid 19th century when its technological advantage was at its peak. Tariffs on manufactured products had returned to 23 percent by 1950 when that was no longer the case.

While in the US, protectionist thinking was predominant in the US during the interwar period, most infamously manifest in the Smoot-Hawley Tariff Act. It is only since the end of World War II, in part due to the Cold War, that the US has been a proponent of reduced tariff-barriers and free trade.

Read more: Protectionism: from Bismarck to Trump

Since the dawn of economics as a discipline, when Smith developed the idea of free trade into its modern form, free trade policies have battled with mercantilist, protectionist, isolationist, communist, populist and other policies.

In fact it is only in the last 27 years since the fall of the Soviet Union that it has surpassed protectionist and mercantilist thinking in many parts of the world.

Trump borrowed from the lexicon of several of these schools of thought when he said the Trans-Pacific Partnership — a trade pact between 12 Pacific Rim nations — was tantamount to rape of the US, that NAFTA was "the worst trade deal in history." 

What next?

"There is a growing backlash against the uneven gains from trade but as those are becoming more of a focus to be addressed by politicians, then hopefully the political mood will better match the amount of cross-border linkages in ideas and global travel that characterizes trade in the 21st century," Linda Yueh, author of the Great Economists, told DW.

Caroline Freund, a senior fellow at the Peterson Institute for International Economics, believes a change of strategy is needed. "Protectionism must be kept at bay. Important parts of TTIP can be salvaged as sectoral agreements," she told Politico.

Some ask how to ensure that a positive economic effect is felt more broadly? "Even if people know that trade, in theory, leads to a more prosperous future, they worry that they may end up grasping the short end of the stick," Mark Wu, a professor of law at Harvard Law School, told Politico

Head shot of a man (Jo Harper) with grey hair and brown eyes
Jo Harper Journalist and author specializing in Poland