In mid-2016, I wrote that it had become fashionable among commentators to highlight the demise of free trade that has dominated economic policy for the past few decades. The presidency of Donald Trump, the British exit from the European Union (EU), and a general upswing in populist sentiment are undeniable indicators of a world with barriers, they say. But is this an accurate narrative?
Since 2000, many people have vehemently argued that the tide would always remain in favour of globalisation. Pulitzer Prize-winning journalist Thomas Friedman’s 2005 book, The World is Flat, has been a rallying call for pro-globalisation optimism. In his book, Friedman makes bold claims about a world in which globalisation, driven by internet connectivity and a resulting openness towards free trade, levels the playing field, minimising historical and geographic divisions.
Wave of populism
In response, Richard Florida, the American social and economic theorist, wrote an article in the US magazine, The Atlantic, entitled “The World is Spiky”. Florida wrote his essay the same year The World is Flat was published – long before the wave of populism in 2016 reinforced the ideas that his work highlighted.
With his thesis on 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, or “spiky”.
Indeed, although trade helped lift hundreds of millions of Chinese out of poverty, a lot of Americans across the country’s industrial rust belt are now jobless. And workers in less developed countries such as Bangladesh continue to face poor conditions and destitution. This inequality – the “spikiness” of the spoils from trade – has fuelled populist movements across the developed world.
The economic consensus remains that free trade, for all its shortcomings, delivers a net benefit to its participants. This is a view grounded in David Ricardo’s 19th century theory of comparative advantage. He showed that if nations focus on producing goods for which they are good at relative to their trading partners, and then trade to acquire other goods, all are better off. Restricting free trade reduces the long-term prosperity of nations, he said.
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, nations around the world turned to protectionism, and international trade ground to a halt. It was only following the second world war that the tide turned in favour of trade once again. Beginning with the 1948 meeting in Havana, Cuba, that created the General Agreement on Tariffs and Trade (Gatt), the world has been on an almost inexorable path towards greater openness. Under Gatt and its successor, the World Trade Organisation (WTO), many tariffs have been removed, and stringent rules and arbitration schemes have been established to promote trade between countries. China’s accession to the WTO in 2001 ushered in an unprecedented era of global trade. China, in particular, has become an ardent advocate of globalisation.
In Britain, the government is committed 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 the country enters the “divorce” process with the EU.
The threat of a regression on free trade policy was always greatest in America. Although Republicans did not welcome any proposals that may harm business interests in the country, they could not prevent Trump from slapping tariffs worth tens of billions of dollars on China and other large US trading partners.
Those warning of an impending trade war seemed to be vindicated. Were trade optimists, myself included, wrong to believe that the free trade consensus would survive? May be, or then may be not. Peter Navarro, Director of the National Trade Council, has emphasised that he is a supporter of “real” free trade. He has a point: China’s trade policies have included technology-transfer clauses and subsidies for domestic firms that do not adhere to the spirit of free trade.
Republican politicians continue to pressure the administration to tread carefully with tariffs: for example, retaliatory tariffs, such as those announced by China, could threaten America’s agriculture industry.
Populist sentiment will not reset the clock on free trade. We probably are not headed back to staunch protectionism. Too many rely too much on the enormous benefits that are being reaped.
In 2016, I found myself too willing to believe that Trump’s rhetoric, given the political realities, would not translate into substantive action. This ignored Trump’s penchant for going it alone and defying even his allies. Trade deals may indeed be renegotiated, but will they be entirely torn up? For now, unlikely. Globalisation is – hopefully – here to stay.