Freedom of Trade Revisited
- Posted by: prosper
- Category: Blog
An essay wriiten by Henco Kotze for the St. Gallen Institute
“The benefits of freedom”, wrote Hayek in 1960, “are not confined to the free” . In no realm is this more evident than the economic, with few institutions doing as much to collectively lift humanity out of poverty as freedom of trade. As global trade went from under $4 trillion in export value to nearly $20 trillion in 2018, the overall welfare of people went up accordingly . Today, more than 1 billion fewer people are living in extreme poverty than did in 1990. In 2015, three-quarters of a million people lived on less than $1.90 a day, down from nearly 2 billion in 1990 . The benefits of free trade have accrued most notably in ‘unfree’ countries; China’s nominal GDP grew by a factor of 28 between 1990 and 2015, with some 225 million people joining the middle class in China alone . Of the next billion entrants into the middle class, around 88% are expected to come from Asia , despite only 38% of people there living in ‘free’ countries .
Yet, despite the well attested benefits of free trade, there has been a trend of growing hostility toward Free Trade Agreements (FTA) . From the dissolution of the largest hitherto FTA (the TPP in 2016) to an ongoing trade war between the two preeminent global trade partners (the US and China), Free Trade is under unprecedented pressure. Even Great Britain, the historic bastion of global mercantile liberalization, found the benefits of Free Trade wanting when it decided to abandon its prosperous position vis a vis Europe in 2016. These trends are reflected in an acidifying trade environment; the WTO lowered their projected growth of global trade for 2020, citing trade conflicts as the driving force behind the depressing trend . Since 2008 there have been over 14 000 protectionist measures implemented worldwide, of which 6 600 originated in G20 countries . Concurrently, in 2018 the US and a dozen other WTO members asserted the position that the Appellate Body of the WTO Dispute Settlement Body had no authority to issue rulings that set a binding precedent . This would potentially undermining the WTO’s ability to resolve the mounting trade disputes. In short, Free Trade is under attack.
This hostility to Free Trade, however, is not merely a reflection of antagonism levied against the operative aspects of trade liberalization. Rather, it is symptomatic of a deeper hostility toward the ontological foundations which underpin Free Trade. The ontology of Free Trade appeals to the merits of freedom, and how our freedom of economic action is both a utilitarian expedient which allows for an optimal position for all practitioners, as well as a right of which all people ought to benefit . Freedom, in this sense, can be justified as a normative right which all people ought to have. Such justifications span the breadth of philosophy and will not be explored here. What is of note, however, is the nature of this inalienable right; especially as it pertains to economic acts. In his seminal essay, Isaiah Berlin argued that one must differentiate between positive and negative freedoms . Positive freedom, argues Berlin, is the freedom to act as one deems necessary; that is to say, it is the ‘freedom to’. Conversely, Berlin identifies negative freedom as being able to act without outside interference; it can be summarized as the ‘freedom from’. There can be little doubt that Free Trade as practiced correlates most strongly with negative freedom, as a key theoretic component in the operation of free trade is that trade between nations ought to be unencumbered by interference; whether from state, non-state or super-state actors. Participants in the market, this account holds, are free insofar as they can pursue their economic interests within a fair and balanced trade environment.
These approaches are reflected in the early justifications for Free Trade, in which individual autonomy and fair access to markets are essential attributes for a prosperous commercial society. As Adam Smith argued “it always is and must be in the interest of the great body of the people to buy whatever they want of those who sell it cheapest” . Such a conception of individual economic actions aggregating to form markets has since become the cornerstone of market economics. David Ricardo refined Smith’s conception with his theory of comparative advantage, in which an optimal trade position is ascertained only with the free trade of each society’s respective products. In subsequent years, scholars such as Jean-Baptiste Say, John Mill and John Stuart Mill would work, both in their political economy as well as in their philosophic contributions, to bake freedom and autonomy of action in an account of a functional economic environment to the point where, as Paul Krugman would remark; “One thing that almost all economists have almost always agreed about is the desirability of free trade” .
However, the qualifying ‘almost’ in Krugman’s statement is notable, as it points to a tradition of dissent in economics on the merits of free trade. No sooner had Ricardo and Say published their works than Friedrich List produced a rebuttal of Free Trade, which emphasized the contextual nature of Ricardo’s comparative advantage. For List, the benefits of Free Trade fall inordinately on the most privileged nations, as they tend to accrue market benefits (such as high capital utilization rates and extensive market access) over time, giving them an insurmountable competitive lead over their under-developed trading partners . Consequently, Free Trade, though beneficial in absolute terms for all involved, diminishes the trade balance of under-developed trade partners relative to their developed peers, further entrenching existing uneven trade relations. Free Trade, for List, is simply a form of ‘Kicking away the Ladder’, whereby developed nations forbid their trading partners from engaging in the same protectionist measures their own initial economic development is owed to . Indeed, for List the merits of Free Trade reflected a fixation on exchange in economic theory, whereas List argued that national wealth could only be expanded through local production gains.
Contemporaneously, List’s model for economic development has often been associated with China, who is variously accused of protectionism, mercantilism, or free-riding in a Free Trade environment. These accusations certainly don’t lack merit: China engages in extensive supply-side market intervention. In 2018, it payed an estimated $22.3 billion in subsidies to listed companies, with that number possibly being 3 times higher when accounting for private firms . State Owned Banks (SOB’s) engage in substantial credit creation, often lending to over-producing State Controlled Enterprises (SCE’s) allowing them to sustain over-capacity. Simultaneously, China restricts domestic market access to foreign firms and products, levying demands for technology-sharing on the firms which are allowed to operate within China’s market, and barring foreign firms which pose a threat to any nascent native industries .
China’s recent actions, however, is hardly unique. Prior to the 1990’s, such supply-side intervention was a widely adopted developmental strategy; from the successful efforts of the Asian Tigers to the dismal attempts in South America. Indeed, the WTO allows for limited protectionism as a compromise with its member states . Yet, China’s apparent intransigence on matters of Free Trade has prompted a stern rebuke from the United States. For the US, the continued intervention of the Chinese state in economic matters makes it impossible for economic agents to act freely and in a fair environment . Not only that, but the US political landscape now features growing scepticism toward the merits of Free Trade. While public scepticism regarding Free Trade is hardly new, it is unique for the executive administration to be the driving force behind hostility against Free Trade. The United States, the key actor in moulding the framework which facilitated the contemporary Free Trade and Globalization phenomena, has grown sceptical of the benefits and the virtues of freedom of trade.
The merits of such scepticism are beyond the purview of this essay. However, what is of note is that neither the US nor Great Britain, or indeed any nation sceptical of Free Trade, has rejected the underlying ontology of Free Trade. Freedom, for these nations, is still an indelible part of their economic ideology. Rather, their rejection of Free Trade is premised on the notion that the existing Free Trade framework is insufficient in guaranteeing free and fair trading environment. Put in the parlance of Berlin’s two conceptions of freedom, the argument is that their trade is not free from restrictions or interference. Free Trade, the argument goes, is no longer free. However, in appealing to List’s conception of global trade, China (and various other developing nations) may make an appeal to economic freedom not unlike that of the United States. As the ‘Beijing Consensus’ holds, a nation ought to have the freedom to pursue economic actions which are conducive to their economic development, free from outside strictures which would otherwise shackle them to a perennially unfair system .
This implied conflict in global trade, between positive and negative freedom, is reflected in the more general conflict between multilateral commitments and sovereignty. As Ruggie (1986) points out, a key success of the Bretton Woods system was that it allowed for a compromise between these two conflicting priorities . Multilateral commitments, Ruggie argues, could only be secured from all participating nations if some guarantee could be made of each nation’s freedom to act in their own best interest. However, by embedding these nations in a broader international framework, the architects of Bretton Woods recognised that the interests of the disparate nations could be aligned, to the point where upholding the liberal international order was in the interest of each respective nation. However, as Ruggie points out, this multilateral alignment was only possible due to the ability of the Unites States to act unilaterally; that is to say, it was only by virtue if the United States’ hegemonic strength that this liberal international order could function.
Now the United States’ hegemonic position is under unprecedented pressure. In a progressively multipolar world, the pareto optimal position for each nation is increasingly shifting away from international multilateral commitments . Consequently, impediments to the free conduct of trade will invariably mount, as strategic concerns usurp narrow economic interests in the international political economy. However, rather than mourn the loss of freedom in the conduct of trade, it is possible to revise the nature of the freedom upon which Free Trade is predicated. Instead of a definition of trade predicated on a negative conception of freedom, Free Trade can be seen as the forum within which countries perform their positive freedom. The WTO, rather than fostering an increasingly unrealistic environment of trade free from political interference, can instead institute a system within which states are allowed to pursue their narrow interests within a framework which co-ordinates state initiatives, and arbitrate the negative externalities of trade conflict. The WTO, in short, must officiate, rather than regulate, the trade environment.
Two changes are necessary for this to be achieved. First, the WTO must accept its inability to resolve disputes based on political disagreements. This can be ameliorated by forming a body of jurists specifically appointed to issue judgements on political disputes, who base their rulings on established international law. While this body would not be able to issue binding judgements, these judgements (and the appointed jurists) would have an advisory role in helping the WTO resolve any external impact these political disputes might have on trade. Second, the Trade Negotiation Committee (TNC) cannot maintain the principle of non-discrimination indefinitely. From China’s Made in China 2025 to Trump’s Made in USA push, mercantilist trends will continue to correlate with the rise in global tensions . Consequently, the TNC will have to adopt the role of umpire, aiming to minimize the discriminatory trade practices of various states rather than enforce and uphold the Most Favoured Nation rule or the national treatment policy.
Writing on the nature and success of the ‘China model’, Beslin argues that the importance of the China model is that rather than provide a template of what must be done to achieve economic development (as is often the case with proponents of the Washington Consensus), it shows what can be done if each nation acts with autonomy and pragmatism to resolve their local economic difficulties . As Jeremy Bentham wrote; “every man is a better judge of what is conducive to his own well‐being than any other man can be” . This is no less true of nations. While tariffs and barriers to trade will certainly mount in a multipolar world, if we can recognise the right each nation has to institute those measures, and act multilaterally to mediate their effects on trade, the success story of China may soon be the success story of the developing world.
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