In July 2017, the Forum on the World Economic Order (WEO) of the Friedrich Naumann Foundation for Freedom launched its first program, entitled “Better Together?: Free Trade in the Protectionist Era.” Over the course of a week, seven international free trade experts from around the world met with trade specialists in Washington, DC working in government, think tanks, NGOs, and the private sector to discuss the current and future state of free trade in light of increasing protectionist rhetoric around the world.
Although the discussion partners spanned the political spectrum, there was strong consensus in support of the global trading order. Therefore, the focus shifted from a discussion of the merits of free trade to dialogue on ways in which increased support for free trade could be fostered around the world, beginning with addressing those who have been disadvantaged by trade. The purpose of this report is to elaborate on these policy recommendations in order to expand their relevance for the world economic order.
8 Key Takeaways from the Program
The following takeaways are a result of the discussion fostered by the experts, and in no way are meant to serve as a comprehensive study on the benefits of free trade or a trade theory reader.
Trade is not globalization, and it is often not to blame
Although free trade is often conflated with the broader phenomenon of globalization, it is important to separate the two, as well as the ire against them. Trade has also become the scapegoat for other deeper economic frustrations such as recession recovery, ineffective monetary policy, and job loss, despite the fact that trade in general contributes to an economy’s overall strength. A salient example is the coal industry, which has experienced disproportionate job loss in the last several decades relative to the sustained (though waning) demand for coal. Though trade and, by extension, globalization have been touted in protectionist rhetoric as the major catalyst behind mine closures and mass layoffs, automation of mining techniques is the actual culprit. Until the true targets of anger and frustration are identified, trade will continue to be disparaged in the global community, and solutions to the actual problems will continue to be avoided.
Internationalization begins at home
Despite countless studies detailing the benefits for individuals as well as the world economic order, decision makers continue to have difficulties convincing their constituents of the value of trade for their societies. As protectionist tendencies in countries such as the United States, the United Kingdom, South Africa and Lebanon have shown, individuals are not easily swayed by facts and figures alone, and are skeptical of internationalization while navigating domestic challenges. Therefore it falls to politicians and other prominent figures to “sell” free trade to their constituents, by illustrating the impact international solutions can have on domestic problems. This requires taking a long view on trade that most politicians shy away from, choosing instead to focus on short-term issues that will help re-election efforts. However, in order to develop a more cohesive international trading community, these hurdles must first be overcome at home.
Protectionism is never the answer
No matter how dire a country’s domestic situation may be, adopting protectionist policies is not the answer. While it may be tempting to believe that a country can better address its issues by closing itself off to the outside world, the reality is that this approach will only close the country and its citizens off to the opportunities and investment that can only come with global interaction. Although free trade is not a panacea for domestic shortcomings, and not all participants will purely benefit, countries like Pakistan have demonstrated that protectionism is not the way forward, but rather a surefire way to get left behind in the global order.
Focus on the social component of trade
Free trade has clear economic benefits for those who engage in it, but its impact on peace-building is often overlooked. Trade encourages contact between individuals around the world, and this interpersonal interaction can help break down intercultural tensions or stereotypes. Free trade allows nations to showcase their unique contributions to the global trading order, and ascribes value to them that can be respected by trading partners. So long as there is robust trade, the incentive for economic disruptions such as war or conflict decreases. However, by dehumanizing trade into a system of automated transactions without regard for the actors behind it, these lessons can be easily overlooked. Even more damaging would be to slow or stifle the flow of goods between countries, eliminating the interactive effects of trade and returning nations to a protectionist, isolationist mindset. In this instance, it is important to recall a quote attributed to French economist Frederic Bastiat: “Where goods don’t cross borders, armies do.”
Equality for the developing, at the hands of the developed
Free trade has reduced global inequality, and has lifted hundreds of millions of people out of poverty. Global value chains and greater mobility of labor have brought jobs to developing countries while bringing eager workers to developed nations, who are often willing to work more menial jobs at lower wages. As developing nations see massive gains from trade in the form of sometimes double digit growth, many developed nations are showing lackluster growth and stagnated wages. As discussed earlier, automation, rather than trade is the primary culprit for this phenomenon, but nonetheless free trade has played a part in increasing inequality within developed countries. It is therefore unsurprising that some developed countries have withdrawn public support for free trade, or attempt to protect themselves by erecting non-tariff barriers, such as the US, UK, and Japan. In order for a truly sustainable economic order, the growing inequality within developed countries must be addressed, to stymie burgeoning resentment against free trade that could inhibit growth for all partners.
Market failure vs. government failure
Many critics of free trade and the current economic order, particularly at the political level, blame the market itself for their country’s individual fiscal failures. In reality, it is government mismanagement of the market, exacerbated by over-regulation and out-of-touch policies, which have led to many of the financial crises that have plagued the globe in the last decade and beyond. Instead of blaming the system and trying to withdraw under the guise of protectionism, policymakers would be prescient to recognize the need to create innovative policy that works within the system, rather than spending time and resources debating its unlikely alternatives.
Actions can have unintended (positive) consequences
Since the launch of his campaign in 2015, Donald Trump has been one of the harshest critics of free trade and multilateral agreements, particularly the North American Free Trade Agreement (NAFTA). On the campaign trail, Trump promised to withdraw the United States from the deal if elected, but since taking office has agreed to renegotiations instead. These renegotiations will involve incorporating new sectors into NAFTA, particularly cyber-based industry, and will seek to update the deal for the 21st century. Although many economists feared Trump’s rhetoric would have a catastrophic effect on the deal, a majority now agree that renegotiations are a positive outcome that may not have otherwise taken place. The NAFTA case also illustrates the importance of separating rhetoric from actions. While words can serve as important signals for predicting policy, ultimately no true evaluation can be made until action is taken.
A pre-WWI crisis instead of a post-WWII crisis
An increase in protectionist sentiment globally and the uncertainty it poses for the world economic order has been described as a post-1945 crisis, given its sharp departure from the focus on collective economic interaction and multilateral institutions following the Second World War. However, these concerns date back much further, to the societal unease that preceded the First World War, which inspired protectionist rhetoric and policy similar to what many parts of the world are now experiencing. Also similar to the pre-1914 era are institutions and other social safety nets failing to provide for publics at large: universities churning out jobless graduates, factories experiencing mass closures, and governments filled with scandal-ridden politicians. As a result, many have turned their backs on the current system in the hope of finding something new, paradoxically by wanting to revert back to a pre-globalized economy. This has become a major concern in Republican thinking, although others identify with aspects of this sentiment as well. However, as history has made clear, withdrawal is not the answer, and protectionism is even less tenable than it was 100 years ago. Instead, all of the discussion partners agreed that the current institutional system is in need of reform, and its issues need to be addressed head on and in global solidarity, in order to develop solutions that will benefit the broader world economic order.
As a result of the discussions fostered through the program “Better Together?: Free Trade in the Protectionist Era,” the following policy recommendations were put forth by our experts:
1. Continue to support free trade around the world: The international community should not withdraw from free trade; rather, engaging in trade should remain or become a priority for national governments everywhere. The overwhelming consensus from the experts was that free trade plays a valuable role in the global economic order, and support for trade needs to be continued despite recent calls for protectionism around the world. Though the benefits of trade are controversially debated, free trade brings greater prosperity to individuals and nations, and allows for international cooperation and accountability that continues to stabilize the international community. Therefore, instead of working against free trade, world leaders should cooperate on ways to make trade more equitable and attainable for all involved.
2. Encourage multilateral trade agreements: Since the introduction of the GATT in 1947, and the WTO in 1995, the international trading community has focused on reducing or eliminating barriers to trade. This has led to the inclusion of more global trading partners, which in turn has led to an increase in multilateral agreements such as NAFTA and CETA, and the conceptualization of TPP and TTIP. Despite protectionist skepticism surrounding the largely-regional approach, generating fears that countries will be allied against and taken advantage of by larger and more powerful partners, multilateral agreements should be considered the future of free trade. More integrated agreements allow for the formation of deeper trading relationships, increasing the potential for wider-reaching prosperity across a multitude of industries and service sectors.
3. Build up support for free trade at home: Although free trade is fostered on the international level, its momentum and legitimacy are contingent on domestic support. Politicians in both developing and developed countries have expressed doubt regarding the benefits of free trade, illustrating that support for protectionism stems beyond a country’s GDP. Rather than turn away from free trade, national and local leaders should emphasize the tangible benefits trade has and continues to have for their societies. At the same time, domestic criticisms should be acknowledged and engaged with, so that measures can be taken to mitigate their effects where possible. Greater transparency can encourage greater trust in decision makers, which may positively affect domestic support for free trade.
4. Devote more time and resources to those left behind by trade and globalization: Economists and politicians have been taking a composite view of free trade that often focuses on the macro-level benefits, ignoring the industries as well as communities and individuals being disadvantaged by changes through free trade. This has caused citizens around the world to reject free trade as a positive outcome of globalization, particularly in developed nations. Rather than shield citizens from the effects of globalization through protectionism, governments should help them adapt to the challenges of the new global economy. Skills retraining can play an integral role in helping individuals transition into new opportunities, mitigating the impact of factory closures and wage stagnation in less-competitive industries that has fueled the protectionist surge. Ultimately, governments should recognize the opportunities available through trade and provide resources which allow citizens to thrive in the global system, rather than stagnate growth through economic isolation.
5. Assist developing countries in adapting to free trade: In many ways, developing countries have benefitted the most from free trade, with countries in Asia and Africa consistently posting double digit growth rates. However, this does not mean that all developing countries are able to utilize this opportunity for growth, particularly when they lack the technical and regulatory support for implementation. A transfer of knowledge between developed and developing countries could be instrumental in realizing maximum growth potential in developing countries, while simultaneously guaranteeing more capable, reliable partners for the developed world. It is also important to note that the line between developing and developed countries is becoming increasingly blurred, as demonstrated by China and India. Therefore, decision makers should not fall back on outdated divisions, but rather share information as they are able, increasing the likelihood of trade agreement compliance by all partners.
6. Lessen the focus on deficits: Deficits have increasingly become the primary indicator of an economy’s health among advocates for protectionism. However, deficits only demonstrate a small portion of the economic picture, and are often dictated by forces outside of the policy realm. Scrutinizing bilateral deficits in particular should be avoided, as competitive advantage and consumer demand ensure that these relationships fluctuate between countries. Although countries run deficits with some partners, it is almost guaranteed that they will run surpluses with others, depending on the goods and services exchanged. It is unrealistic to expect a country to only run trade surpluses, and the consequences that come with it, just as self-sufficiency in goods and services is unattainable. Therefore, criticizing countries based on bilateral trade deficits is not only an inaccurate way of measuring economic competitiveness, but can also impact diplomatic relations between countries.
The Forum on the World Economic Order would like to thank the expert participants for their insightful contributions and commitment to the program, as well as the discussion partners in Washington, DC for their willingness to share their professional expertise and engage in dialogue on free trade and protectionism.
Courtney Flynn, Program Associate, Forum on the World Economic Order, Friedrich Naumann Foundation for Freedom.