We live in a world in which international agencies have proliferated, both in the political and economic spheres. Economically, the World Bank and the IMF are paramount, and then there are the G8 group of leading advanced economies, the G20 group which accounts for some 85% of global GDP and other attendees at the G20 annual meetings including the OECD, the Financial Stability Board, and the International Labor Organization – and a myriad of others that don’t rise to the eminence of G20 invitations. All these organizations provide well stuffed if somewhat tedious and travel-filled existences for international bureaucrats. But only one such group has a genuine economic rationale for its existence — the World Trade Organization. The rest are either an expensive waste of money, or active agents of economic disruption.
Free trade is not a natural economic policy. Thomas Mun’s “England’s Treasure by Forraign Trade” written about 1630 proposed encouraging exports and blocking imports, thereby piling up valuable stores of gold which made the country richer and more powerful. (It’s not entirely a foolish theory; Britain’s military successes against France in the eighteenth century were largely due to the country’s superior access to finance.)
However Adam Smith in 1776 and David Ricardo in 1817 propounded the classic free trade theory, including Ricardo’s doctrine of comparative advantage. The theories were taken up by the remarkably economically literate generation of British statesmen that included William Pitt (1759-1806) and Robert, Lord Liverpool (1770-1828), who removed many of the high tariffs that had previously existed, thereby turning smuggling from a staple feature of 18th century commerce (particularly in the American colonies) into a marginal economic activity.
British trade when Liverpool retired in 1827 was not however free; there was a substantial duty on corn, which varied according to the market price, and moderate duties on most other items, with special lower rates for imports from the colonies. It was only under Robert Peel in the 1840s, and his Whig successors such as William Gladstone and Richard Cobden, that full free trade became a reality for Britain, by a succession of legislative enactments between the 1846 Repeal of the Corn Laws and the 1860 Cobden Treaty.
For generations of Whig historians, the Peel/Gladstone/Cobden legislative enactments were the finest triumph of nineteenth century economic policy. However, those of us who are not Whigs should look at this claim with a jaundiced eye. Not only did repeal of the Corn Laws directly cause the great British agricultural depression of 1873-1939 when the U.S. West was opened up by railroads and refrigeration, but there’s also good evidence that the country’s free trade policies contributed significantly to Britain’s overall relative economic decline. The Bessemer steel process, for example, was first expounded to the British Association meeting in Cheltenham in 1856, but the U.S. steel industry came to dominate the world market through high protective tariffs, and by 1914 was undercutting the price of British steel by as much as 30%.
The problem lay in the unilateral nature of Britain’s move to free trade. In 1846, British industrial preeminence was unquestionable, and its example led to free trade movements elsewhere, such as the German Zollverein, and indeed the first notable example of trade cooperation in the 1860 Cobden-Chevalier treaty with France. But after 1860, policy in Britain’s trading partners reversed. The U.S. established the high Morrill tariff in 1862 after the economically illiterate Abraham Lincoln had succeeded the much more sophisticated James Buchanan, author of the moderate free-trade 1857 tariff. There were rises in French tariffs in 1871 and 1892, a major new German tariff in 1879 and the highly protectionist U.S. McKinley Tariff of 1890.
By 1914, far from contributing to a new world of peace and universal free trade, as the naïve Peel, Gladstone and Cobden had believed, British free trade had given the country a major competitive disadvantage in world markets, especially in new industries such as steel and chemicals. It had also contributed to dissolving the bonds of Empire, as the Dominions, now self-governing, saw no benefit in maintaining preferential trade arrangements with Britain – in this context the 1911 Canada-U.S. Reciprocity Agreement was especially significant.
After World War I the weakened Britain sought to strengthen intra-Empire ties through a modest tariff wall surrounding the Empire market, eventually instituted in 1932. However, Britain’s need for U.S. economic and military assistance in World War II and the exceptionally poor negotiating performance of Maynard Keynes at the Bretton Woods conference led to the collapse of even this belated attempt at creating a level rather than hopelessly tilted playing field for British trade.
Unilateral free trade is thus a sucker’s game – and one not played by the major advancing economies of the 19th and 20th Centuries such as the United States, Germany, Japan and now China. Equally, the costs of protectionism were graphically demonstrated by the 1930s, during which world trade fell by 65% and various countries succumbed to militarism. Thus by the 1940s it was obvious – or should have been – that some form of international trade organization was needed. However the crazed Marxists of Bretton Woods failed to establish one; it was the one form of international bureaucracy which they felt to be unnecessary. Maybe Harry Dexter White’s golf games with the Soviet delegation convinced him that trade was a capitalist frippery, but Keynes, no golfer, should at least have had the sense to squawk at this abandonment of Britain’s most pressing need.
The first General Agreement on Tariffs and Trade was signed in 1947, and in the early years after World War II progress towards free trade was rapid. The United States was by far the dominant world economy, and under the less Marxist-dominated Truman administration and afterwards it was a full-hearted convert to free trade – for one thing, active trade with the U.S. and the West in general was thought to be a useful lever in preventing poor countries from being subverted by COMECON. It also helped that major recessions seemed to be a thing of the past; with the world economy advancing with only modest downturns, opening trade seemed to be a win-win game.
As U.S. economic dominance declined, and the protectionist EU and Japan became more important, momentum towards free trade lessened. Five rounds of GATT agreements were signed by 1960, with no negotiation taking the longer than 11 months; then the sixth (Kennedy) round took 37 months to negotiate, the seventh (Tokyo) round took 74 months and the eighth (Uruguay) round took 87 months. That was partly because the easy issues had been settled; tariffs on manufactured goods had been reduced to low levels by the time of the Kennedy Round, and such matters as services and intellectual property, as well as recalcitrant sectors such as textiles were always more difficult to agree upon.
The real leap forward of the Uruguay Round, signed in 1994, was the establishment of the World Trade Organization. At last there was an international umpire to intermediate trade disputes, impose modest sanctions on malefactors, and act as a permanent lobby for trade liberalization and against Smoot-Hawleyism.
It hasn’t really worked as planned. In the prosperous 1990s, the WTO’s trade adjudication mechanisms functioned well, but since 2001 it has become increasingly ineffectual. However even at the top of the global boom in 1999, when a new round of trade talks was supposed to be launched, the meeting was disrupted by unexpected protests by the West’s economic illiterates and the world’s leaders wimped out of setting the new round in progress.
After the shock of the 9/11 attacks, a new Doha Round was launched, but it has made little progress and is now moribund. There appear to be a few sticking-point issues, including (i) agriculture, where the pampered farmers of the U.S., the EU and Japan will not open their markets to cheaper Third World produce, (ii) services, where India, Brazil and many emerging markets will not open their markets to more efficient Western producers, and (iii) intellectual property, where the emerging markets with some justification regard the patent and intellectual property systems of the West as vulgar systems of rent extraction.
Since the 2008 recession, trade barriers have risen rather than fallen, with the WTO providing only feeble opposition. What’s more, when the WTO needed a new leader in May 2013, instead of selecting a Mexican with a good track record, instrumental in negotiating NAFTA, the world’s emerging markets, selected a protectionist Brazilian. (Each country in the WTO has one vote, a spurious excess of democracy. Voting should be trade-weighted, thereby encouraging countries to open their markets and contribute more to world trade.) Roberto Azevedo may surprise us, but it’s more likely that he will bring to the WTO the protectionist, statist economic principles that have made Brazil ever the growth economy of the next century but two.
Thus the mechanism for keeping global trade flowing exists, but there are increasing signs that it cannot do its job. Should we head into another global downturn (as is even more likely after Ben Bernanke’s foolish refusal to end the Fed’s economically destructive bond buying program) it seems inevitable that the world will see a mass outbreak of new Smoot-Hawleyist trade barriers and a collapse in world trade, with all the accompanying economic and political damage, as in the 1930s. The world will have only itself to blame.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)