Will Free Trade Strike Back? | Dan Mikhaylov

For conservatives in various corners of the world, the previous year was troublesome and tremorous. The coronavirus pandemic precipitated a largely inescapable – and often unreasonable – government assault on individual liberties and wellbeing. Western cultural heritage and moral foundations came under fire from the parlous alliance of progressive elites and anticolonial activists of the Black Lives Matter movement, as we finally awakened to the extent to which our press and educational institutions have helped diffuse socially implosive and hateful ideas. The frighteningly widespread political divisions in the United States, where Republicans and Democrats hold divagating opinions regarding the recent presidential election’s integrity, are fuelling anxiety and pessimism about the future of the Western world.

True to Sir Isaac Newton’s Third Law, positive development nonetheless did not go extinct, but produced a praiseworthy retort in some policy areas. Four Muslim nations recognised the state of Israel, which normalised relations with erstwhile geopolitical adversaries for the first time since the 1994 Wadi Araba Treaty with Jordan. Scientific research, more often than not, supported by the private sector, not just produced several COVID-19 vaccines in record time, but also made strides in cancer and hepatitis B treatment, thereby vindicating that capitalism is conducive to accelerated innovation and desirable social change.

Furthermore, free-market conservatives might have cheered on the international community’s seemingly renewed commitment to free trade. At first glance, the narrative is sanguine: in a period of resurgent mercantilism and global economic downturn, the Washington Consensus – the umbrella term for trade liberalisation and deregulation measures advocated by such supranational organisations as the International Monetary Fund and World Bank and modelled on the Western world’s neoliberal economics – both survived being rejected by the Trump administration and successfully mustered support elsewhere. In Britain, we lauded the Conservative government’s free trade agreements with Japan and Canada, while some conservatives have even overlooked the irrefutable economic concessions in the recently concluded trade deal with the European Union, for Boris Johnson delivered on the promise to shield British exports from the EU’s protectionist tariffs.

Meanwhile, Australia and New Zealand have formed the Regional Comprehensive Economic Partnership together with thirteen Asian economies, including Japan and China. Crowned the largest trading bloc in human history, the RCEP comity of nations accounts for a third of worldwide GDP and population and is expected to eliminate more than 90% of import tariffs within the next two decades to facilitate commercial flows across East and Southeast Asia. Simultaneously, Africa kickstarted the equally impressive African Continental Free Trade Area, which encompasses 63% of the continent’s countries and is aimed at helping post-pandemic recovery and overcoming the passel of financial and political impediments to development that had traditionally curtailed regional growth and socioeconomic improvement.

However optimistic the situation might appear to free-marketeers and libertarian-leaning conservatives, we should not mistake these developments for the inevitable and indomitable revival of free trade. Certainly, observers and commentators alike would be simpleminded for not recognising the importance and popularity of removing tariffs and facilitating the interstate exchange of goods and capital in the modern world. Even the Trump-era Republicans, frequently associated with mercantilism and thence credited with initiating a destructive protectionist war with China, justified mercantilist policies as a temporary measure against dishonest and illicit practices in bilateral trade and a bargaining chip for renegotiating the extant arrangement and guaranteeing mutual compliance. According to the former US president’s advisor Peter Navarro, imposing a 45% tariff on products imported from China constituted the lesser evil and aimed to end Chinese intellectual property theft and dumping. Free trade remains a popular policy option, and its comeback could have been anticipated amid the pandemic uncertainty and financial debilitation; the real moot point is whether this resurgence will be sustained for the foreseeable future.

This is where the “free trade strikes backweltanschauung begins to crumble. While there is evidence that trade liberalisation could expand the role played by domestic industry in national supply chain networks and largely avert the hollowing-out effect, while benefitting consumers thanks to greater market competition, there are two reasons why mercantilism is unlikely to wither and give way.

Firstly, national security speaks strongly in favour of protectionism. Herein, we need not look further than the aforementioned Trump administration tariffs on Chinese imports, justified on the basis that Beijing putatively employed currency manipulation and intellectual property theft tactics to help Chinese businesses gain a foothold in America’s market. Such concerns predate Trump. Thus, the 1994 General Agreement on Tariffs and Trade (GATT) stipulated that measures to counterpoise dumping – a phenomenon where one company prices goods below the market value to undercut competitors and increase market share – are legitimate, if they cause or threaten material injury to a domestic industry in the importing state or hamper domestic industry creation. Moreover, such concerns would only grow, as the definition of national security expands and incorporates such remits as telecommunications with the Huawei controversy still ongoing.

National security-driven mercantilism also has the appropriate ideological foundations, with even Adam Smith acknowledging the need to compromise free trade on these grounds. Writing just fifteen years later, Alexander Hamilton arrived at the selfsame  conclusion: developing states often face bad terms of trade, as they have less to offer prosperous and sophisticated economies, and must ensure the “prosperity of manufactures” by artificial means to stimulate domestic production of the resources thought indispensable to national security. Otherwise – in more general terms – one nation might specialise in toys, whereas another in weapons; needless to say, the former stands little chance of defending itself against the latter under these circumstances.

Secondly, mercantilism is not without justification from the developmental perspective. As Cambridge University’s Ha-Joon Chang has illustrated in several of his publications, protectionism benefits the catch-up economies, which implement tariffs to encourage the creation of domestic manufacturing and generate employment opportunities for their mostly low-skilled workforce to attain parity with more developed economies. Besides facilitating the nineteenth-century Germany and Japan and alimenting their rivalry with the more established colonial empires, such as Britain and Russia, developmental protectionism had in many respects defined Britain’s trade policy for a long time. The Navigation Acts, for instance, were envisaged as a mercantilist tool to stimulate domestic industrialisation. The contemporary Prime Minister, Robert Walpole, lauded the 1721 Navigation Act by proclaiming that “nothing so much contributes to promote the public wellbeing as the exportation of manufactured goods and the importation of foreign raw material”, since it increased duties on imported foreign manufactured goods and provided export subsidies, also known as bounties, to silk products and gunpowder. In fact, it was not until the repeal of the Corn Law that the country abandoned its longstanding protectionist tradition, and there is no guarantee that today’s developing states would avoid protectionism in their pursuit of economic and industrial development. In turn, by embracing tariffs, they would most probably incur the wrath of the more developed countries and precipitate new trade wars, all the more since many developed economies are now home to strong populist movement that view international free trade with scepticism in the first place.

Although free trade, as formulated by David Ricardo and Adam Smith, has outlived the mercantilist Trump administration and recently birthed two breakthrough deregulatory agreements, which are predicted to create thousands of jobs for those living in East Asia and Australasia and Africa, it is yet to outvie mercantilism. The battle between free-market conservatism and populist or patriotic protectionism is far from over. While the former are now dominating the headlines and feeling proud that capitalism has persevered through the COVID-19 supply chain disruptions, the latter still have arguments up their sleeve. Post-pandemic recovery might encourage developmental protectionism, given its record of success in the developed world. At the same time, a return to normalcy would imply a return to geopolitical competition and security threats, which too signals little opportunity for free trade. Without addressing these challenges, free trade will certainly not strike back.

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