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Today, no government sees defending liberal trade as its first order of business. More urgent matters demand attention. But trade is no sideshow. If governments fail to shape a stronger trade system, and defend it to their voters, a reversal of globalisation is possible. That could end up causing more long-term economic damage than any other consequence of the coronavirus calamity.
The world’s leaders need to understand, first, why a permanent retreat from liberal trade could indeed happen. They next need to see just how dangerous such a development would be. Then, having belatedly grasped how much is at stake, they should repair and improve the order that risks coming apart — by realigning the politics of free trade, refurbishing the global trade architecture and strengthening the domestic response to globalisation and its discontents.
At the turn of this century, the economic consensus in favour of liberal trade had been fairly solid. In the time of Bill Clinton and Tony Blair, center-left politicians subscribed to it as much as pro-business conservatives did.
Over a period of decades, lower tariffs and lighter
restrictions, together with technological progress in transportation and communications, drove a massive expansion in global trade volumes. From 2005 to 2014, for instance, world trade in goods nearly doubled, from about $10 trillion to $18.5 trillion.
Yet this expansion also ran alongside China’s rise as a new economic power, which some found disturbing in its own right. In the US, the domestic implications of a growing trade deficit with China were
brutal. More broadly, manufacturing output in advanced economies shrank (as a share of the total, if not in absolute terms). Under the combined pressure of cheap imports and automation, manufacturing jobs disappeared.
This shift, in turn, gave rise to the view that the benefits of free trade had been exaggerated and its costs too long ignored. In one way, this was puzzling: Nobody had ever denied that liberal trade, like technological progress, causes economic disruption. Even so, prevailing opinion shifted from “We all believe in free trade†to “It’s complicated.â€
Then came President Donald Trump. Fixated on the idea that trade is a battle that the US was losing, he set about wrecking the system. Attesting to the wider shift in thinking, his political opponents criticised him only tepidly, if at all, for this new direction. The country’s immune system was compromised: American politics had lost the antibodies it needed to reject protectionism.
And that was before Covid-19. The pandemic caused critical shortages of essential equipment and materials, exposing the fragility of finely tuned, geographically extended supply chains. Suddenly liberal trade was not just a destroyer of jobs, but a killer
as well, leaving countries bereft of life-saving supplies. The implication seemed clear: Rather than worshipping the false god of free trade, countries should be thinking more about safety and self-sufficiency.
It would be hard to overstate the damage this thinking might do if it tightens its grip on Western politics. Of late, the remaining support for liberal trade has been powered more by popular opinion than by expert consensus or political leadership. (Guided by mere common sense, people object to tariffs that raise prices and lower their standard of living.) The rigours of Covid-19 and its aftermath, especially if it involves persistently high unemployment, might change this, recruiting broader opinion to the anti-trade cause. The retreat from globalisation might then accelerate.
Downplaying some of the costs of liberal trade was wrong, but ignoring the benefits is certainly no smarter. Over the years, these have been enormous for rich and poor countries alike. They go far beyond the classical gains due to specialisation and economies of scale. Trade strengthens competition, which erodes monopoly profits while promoting innovation and efficiency. It spreads knowledge and capital. And it expands the variety of goods available — an effect that’s difficult to measure and often ignored, but which raises living standards greatly in its own right.
Recoiling against globalisation doesn’t just involve forgoing those benefits, serious as that would be. It also means incurring the costs
of dismantling existing economic networks and scrapping the associated investments. It would pile another set of shocks on the stresses that economies already face. It would make a bad situation much, much worse. Recognising this danger is the first step toward a political and intellectual realignment that restores the commitment to liberal trade. This restoration is essential, but by itself it won’t be enough.
The purpose of the World Trade Organization, established in 1995, was to extend and underpin the liberal trading order. The US and its allies used its predecessor, the General Agreement on Tariffs and Trade, to superb effect from 1948 onward, lowering trade
barriers and building a globally integrated economy through successive rounds of wide-ranging talks. But since the turn of the millennium, they’ve let the WTO fade into irrelevance.
The most recent round of multilateral negotiations is a case in point. After years of getting nowhere, it eventually collapsed altogether. Progress toward freer trade, such as it is, has moved to regional agreements such as the European Union and
the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — a second-best approach,
because it lets barriers between insiders and outsiders persist.
—Bloomberg
Clive Crook is a Bloomberg Opinion columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic