Free Trade: Not in Mortal Peril

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It’s become fashionable among commentators to mourn what they see as the end of the free trade consensus that has dominated economic thought and policy for decades. The US presidency of Donald Trump, Britain’s exit from the European Union, and a general upswing in populist sentiment are ceaselessly referenced as undeniable indicators of a world with barriers. But is this an accurate narrative?

Thomas Friedman’s book The World is Flat is frequently held up as the epitome of pro-globalisation optimism. In it, he makes bold claims about a world in which globalisation, largely driven by Internet connectivity and a resulting openness toward free trade, levels the playing field across the world and makes historical and geographic divisions inconsequential.

This view is too rosy. The critiques populists, and others, raise regarding globalisation and free trade are manifold and legitimate. In response to Friedman, Richard Florida, the American social and economic theorist, wrote an article in The Atlantic entitled The World is Spiky. Florida wrote in 2005, long before the current wave of populism extended and reinforced the ideas that his work highlighted.

With his thesis of the “spiky” world, Florida focused on the sometimes exploitative nature of the global economic machinery, and the inequality this breeds between rich and poor countries. Where Friedman postulated that the forces of globalisation would spread the wealth, thus the “flat” world, Florida argued that the gains were likely to be geographically concentrated – “spiky”.

Indeed, although trade helped lift hundreds of millions of Chinese out of poverty, workers in countries like Bangladesh continue to face poor conditions and destitution. As recent elections have highlighted, the malaise of untenable inequality – the “spikiness” of the spoils from trade – extends to within countries, which has fuelled populist movements across the developed world. New research by economists has led many to believe that, in the American rust-belt, manufacturing job losses could permanently depress incomes in the region – despite the country’s general prosperity.

For all of the drawbacks of trade, the economic consensus remains it delivers a net benefit to its participants. This is a view grounded in David Ricardo’s 19th century theory of comparative advantage. He demonstrated that if nations focus on producing goods for which they have an advantage relative to their trading partners, and then trade to acquire other goods, everyone is better off. This holds even if one nation has an absolute advantage in producing every good – it is still relatively better at some things than at others. Restricting free trade, it then follows, will reduce the long-term prosperity of nations.

As Ricardo’s views gained traction, trade blossomed in the 19th century, and was the major engine of economic growth. But once the Great Depression struck in the early 1930s, the world turned to protectionism, and international trade ground to a halt. It was only following the second world war that the tide turned to favour trade once again.

Beginning with the 1948 meeting in Havana that created the General Agreement on Tariffs and Trade (GATT), the world has been on an almost inexorable path toward greater openness. Under GATT and its more recent successor, the World Trade Organisation (WTO), tens of thousands of tariffs have been struck, and stringent rules and arbitration schemes have been drafted to promote uninhibited trade between countries. Once China joined the WTO in 2001, there was no looking back.

And while it is true that politicians are mulling policy changes that would be obstructive to trade, it is unlikely that the most draconian of such measures will come to pass. China and India, the two largest developing economies have shown little animosity toward trade.

China, in particular, has become an ardent advocate for globalisation. In an irony not fully appreciated, the General Secretary of the world’s largest Communist party – none other than Chinese President Xi Jinping – delivered a speech at the World Economic Forum this year expressing China’s deep commitment to global trade.

In Britain, the government remains devoted to upholding the nation’s ability to trade without barriers – despite its people’s desire to exit the European Union. Although populist sentiment is strong, Britain’s ability to trade more or less freely with the EU remains a top concern of policymakers as Britain enters the “divorce” process with the EU. Polls show that the British public is, anyway, more concerned about limiting immigration than it is with trade, per se.

It is in the US that the threat appears strongest. Yet the Republican establishment, backed by business concerns, will be loathe to welcome any proposal that may harm business interests in the country. Tariffs certainly would. And although the benefits of trade to consumers are often quite diffuse – while the harms to workers are more direct – they too would find little to celebrate in the higher prices and reduced choice that are inevitable consequences of more expensive imports.

Potent as it may be, the current, and somewhat faltering, wave of populism will not reset the clock on free trade. The pundits like a dramatic tale, but it seems fanciful to believe that we are headed back to the interwar period of staunch protectionism. Globalisation is here to stay.

A version of this article appeared in the South China Morning Post's Young Post: https://yp.scmp.com/over-to-you/columns/article/106648/don%E2%80%99t-listen-naysayers-%E2%80%93-globalisation-here-stay