Global free trade, an essential element of economic freedom, is under threat
Free trade is essential to economic freedom—individuals should have the right to buy from and sell to anyone anywhere. Yet, it’s under threat globally. Left-wing and right-wing populist movements in Europe and the United States denounce free trade while Asia’s Trans Pacific Partnership is on the ropes. It was once called the “gold standard” of trade agreements by Hillary Clinton who, under left and right populist pressure, then opposed it.
Such developments are what enable British Prime Minister Theresa May and Chinese supreme leader Xi Jinping to pose as a free-trade champions. May has a semi-legitimate claim. She opposed Brexit, though now must negotiate it. The EU imposes a number of economic freedom-suppressing measures on its members, so Britain’s departure is hardly a full attack on economic freedom. May is doubtless sincere in hoping to open the world to British trade. Yet, it was opposition to the free movement of people and goods that drove Britain’s Brexit vote. The anti-EU focus was on immigration from other EU members, though most economists believe that free movement of people is essential for a true free-trade area.
Xi, on the other hand, is a total hypocrite when he says the world “must remain committed to developing global free trade and investment, promote trade and investment liberalization and facilitation through opening-up and say no to protectionism.”
China throws up barriers to international competitors (for example, barring Internet sites such as Google both to suppress free speech and to boost Chinese search engines with a giant captive market—a win-win from Xi’s viewpoint), assaults foreign investment through various requirements for domestic partnerships, legal attacks, and hi-tech property thefts, and illegal dumping—the sale of goods internationally at below their cost of production. (Many argue that the importer of dumped goods is actually the winner—after all, they’re getting something for less cost than they could make it themselves. For example, U.S. manufacturers benefit from cheap steel from China. But dumping is prohibited by the very rules XI claims the world should respect.)
Xi claiming to be an exemplar of free trade is like President Trump declaring himself an exemplar of humility. It is friends like these that reveal the magnitude of the threat to free trade.
The huge danger is a repeat of the U.S.-inspired 1930s trade war, launched by the protectionist 1930 Smoot-Hawley bill named after Senator Reed Smoot and Congressman Willis Hawley. Donald Trump’s anti-trade rhetoric raises the spectre of another trade war. “Trade deals are absolutely killing our country,” he claims. Depending on the day of the week, he calls for tariffs from 20 to 45 per cent on a hodgepodge of countries.
In the years after Smoot-Hawley, world trade fell by two-thirds as did U.S. trade with Europe. The causes were varied but one influential study estimates that the Smoot-Hawley inspired trade war caused half the decline. Benefits? The Depression worsened for U.S. farmers and workers, the supposed beneficiaries. Most dangerously, the resulting global economic downturn helped that most extreme populist, Adolf Hitler, rise to power, paving the way for the ultimate outbreak of war.
With international tensions rising almost everywhere, an economic disaster in the Smoot-Hawley mode is not only bad economically but also raises international risks. Global trade is rather better than global war, and sadly, few sincere champions for it are currently marching on the world stage.