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Grossman: Free Trade Forever

Grossman: Free Trade Forever

2.1.2014 15:59

On December 7, representatives from the World Trade Organization’s 159 member countries reached agreement on the first multilateral trade deal in the WTO’s 19-year history. Although the Trade Facilitation Agreement – dubbed the “Bali package,” after the Indonesian island where the meeting took place – did not address the most pressing North-South trade issues, it remains an important economic and political milestone.

The Bali package commits WTO members to moving toward lowering non-tariff trade barriers – for example, by establishing more transparent customs regulations and reducing trade-related paperwork. These changes might seem like bureaucratic minutiae, but the agreement’s impact – adding $1 trillion to global output and creating 21 million jobs worldwide – will be substantial.

The agreement has been criticized for failing to meet the goals set out in the WTO’s 2001 Doha Development Agenda. But these objectives – including improvement of market access in agriculture, manufacturing, and services; clarification of international trade rules; and progress on addressing relevant environmental issues – were overly ambitious. Even the modest Bali package was touch and go, requiring an extra day of negotiations to reach agreement on contentious issues like Indian farm subsidies and the US embargo of Cuba.

Nonetheless, it is clear that trade liberalization is gaining momentum. Consider the impressive scale and scope of other multilateral trade agreements – such as the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and the Trade-in-Services Agreement – that are currently being negotiated.

Current progress toward trade liberalization underscores how trade policy – especially that of the United States – has improved over the last hundred years. The early nineteenth century was characterized by high tariff rates in both the US and Europe. But, during the last few decades of the century, European tariff rates fell substantially, largely in response to the United Kingdom’s unilateral repeal of the Corn Laws, which had imposed substantial tariffs on imported grain. The US, however, continued to charge much higher tariffs.

Unlike in Europe, partisan politics shaped US trade policy before World War II, with the Republicans raising tariffs and the Democrats reducing them. One of the most notable hikes occurred in 1922, when the Republican-controlled government passed the Fordney-McCumber Tariff, which raised the average import tariff rate by 64%.

This triggered vehement protests – and strong retaliation – from America’s trading partners. From 1925 to 1929, 33 tariff revisions were made in 26 European countries, and 17 were made in Latin America. International conferences in Brussels in 1920, Portorose in 1921, and Genoa in 1922 – as well as the League of Nations’ World Economic Conference in Geneva in 1927 – endorsed a tariff truce, but to no avail.

In 1930, US President Herbert Hoover and a Republican Congress, enacted the Smoot-Hawley Tariff Act, sending the tariff war into high gear. Though the Smoot-Hawley tariff increases were modest compared to those under Fordney-McCumber, their timing turned the act into a virtual synonym for bad trade policy. According to the League of Nations, Smoot-Hawley triggered “an outburst of tariff-making activities in other countries, at least partly by way of reprisals,” with substantial duty hikes made almost immediately by Canada, Cuba, France, Italy, Mexico, and Spain.

Thus, though Smoot-Hawley was not a direct cause of the Great Depression, as many have claimed, it did contribute to a breakdown of international trade precisely when the world could least afford it. The two-thirds decline in aggregate imports from 1929 to 1933 was only partly a result of falling incomes, and hence import demand; retaliatory trade and exchange-rate policies also played a major role in bringing about the global trade collapse.

Even when world trade finally began to revive after the depression ended, it remained fragmented, developing primarily within trading blocs and regions. It was only after World War II – when the General Agreement on Tariffs and Trade (succeeded in 1995 by the WTO) began the process of multilateral trade liberalization – that Smoot-Hawley’s destructive legacy was finally overcome.

Of course, protectionist pressures have occasionally arisen since then. For example, during the 1992 US presidential campaign, Ross Perot argued that ratifying the North American Free Trade Agreement would lead to a “giant sucking sound,” as US jobs migrated to Mexico and American workers’ wages fell. And many countries have introduced minor – and not so minor – impediments to trade since WWII.

Nonetheless, the overall trend has been toward increased openness. In fact, the post-war era has been the longest sustained period of trade liberalization in history – a particularly impressive feat, given that the world has just suffered the worst economic downturn since the Great Depression. Indeed, policymakers nowadays seem genuinely disinclined to resort to tariff increases.

There is no denying that Bali was not a complete success, and much of the WTO’s Doha agenda remains unfulfilled. But the fact that countries have continued to pursue trade liberalization, however gradually, at a time of weak economic growth, suggests that free trade is here to stay.

Richard S. Grossman is a professor of economics at Wesleyan University and a visiting scholar at Harvard University’s Institute for Quantitative Social Science. His most recent book is WRONG: Nine Economic Policy Disasters and What We Can Learn from Them.

Copyright: Project Syndicate, 2014.

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