free trade: the next 50 years

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Free trade: The next 50 yearsRazeen Sally aa Head of the Trade Policy Unit , London School of EconomicsPublished online: 11 Nov 2009.

To cite this article: Razeen Sally (2004) Free trade: The next 50 years, South African Journal of International Affairs, 11:2, 11-19

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11

Free Trade: The Next 50 Years

Razeen Sally*

In the last half century, expanding international trade and capitalflows have progressively reintegrated the world economy in ever

more complex ways. But protectionism lurks everywhere, alwaysassuming new and potent forms. In the spirit of John Bright, one canfight for the freedom of trade in the next half century; but, echoingAdam Smith, it would be Utopian to expect outright victory.Protectionism will still be around in 2054, and the battle will continueto rage. What are the emerging facts on the ground in terms of globalpolitical and economic trends? And what of the case for free trade inthe next 50 years?

Taking stock: The case for free trade, past and present

Meta-economic arguments for free trade date back at least twomillennia. An intellectual tradition from early Christian thought toRichard Cobden, Woodrow Wilson and Cordell Hull holds that openand flourishing international commerce brings about betterunderstanding between peoples and buttresses peaceful, ever-closerinternational relations.

The economic case for free trade emerged one-and-a-halfmillennia later. Adam Smith's genius was to draw on pre-existingtraditions of moral philosophy and economics to lay out a system ofinter-relating economic phenomena animated by laisser faire, or whathe called 'natural liberty'. This he extended to international trade.

Smith's system has been refined down the past two centuries. Aninternational division of labour according to comparative advantageallocates resources more efficiently, resulting in the greater wealth ofnations. It integrates hitherto separated national economies into aworldwide cooperative system that caters for reciprocal wants. Thereare all-round material gains, for rich and poor countries alike.

* DR RAZEEN SALLY is head of the Trade Policy Unit at the London School ofEconomics.

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These are the short-term (or static) gains from trade. That is but thenecessary preface for capital accumulation, economies of scale andother long-run (or dynamic) gains, such as the transfer of technologyand skills, and the competitive spur that comes from exposure toworld-class standards of practice. This feeds into productivity gains,increases in real incomes and economic growth. Indeed, it is thedynamic gains from trade that Smith and his contemporary DavidHume emphasised. They strongly linked free trade (broadly defined toinclude cross-border flows of capital and people) to domesticinstitutions and growth, all on the canvas of the long-run progress ofcommercial society.

Smith fortified his presumption in favour of free trade with anexplicit political argument. Protectionism is driven by 'the clamorousimportunity of partial interests' that capture government and preventit from having 'an extensive view of the general good'. Free trade, incontrast, tilts the balance away from rent-seeking producer interestsand towards the mass of consumers. It is part of a wider constitutionalpackage to keep government limited, transparent and clean, enablingit to concentrate better on the public good.

As important to Smith and Hume was the moral case for freetrade, centred on individual freedom. Individual choice is the engine offree trade, and of progressive commercial society more generally. Itsparks what Hume called a 'spirit of industry'; it results in much betterlife-chances, not just for the select few but for individuals in the broadmass of society who are able to lead more varied and interesting lives.

To sum up: free trade is of course associated with standardeconomic efficiency arguments. But the classical liberal case for freetrade is more rounded, taking in the moral imperative of individualfreedom and linking it to prosperity. Finally, free trade contributes to,though it does not guarantee, peaceful international relations.Freedom, prosperity, security: this trinity lies at the heart of the case forfree trade.

Taking stock: Free trade in practice

The historical record shows that countries that are more open to theworld economy grow faster than those that remain closed. Post-1945,the gradual liberalisation of trade and capital flows in the Organisationfor Economic Co-operation and Development (OECD) spurred WestEuropean reconstruction, recovery and catch-up growth. The outwardorientation of Japan and other East Asian countries played an


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Sally: Free Trade 13

important role in their catch-up growth. The massive liberalisation offoreign trade and inward investment in China, in tandem with internalliberalisation, has contributed to spectacular and sustained growthsince the 1980s.

Developing and transitional countries with progressively moreliberal trade policies have growing ratios of trade and inwardinvestment to national income, with rising shares of manufactures intotal exports, and with sustained increases in real incomes per head.These are mostly middle-income countries bunched in East Asia, LatinAmerica and Eastern Europe, but now include low-income but fast-growing China and India. The bad news is that this leaves about twobillion people in 75-plus countries with stagnating or decliningaggregate growth. These are low-income and least-developedcountries that have liberalised less, though they suffer too from otherintractable problems such as poor climate and geography, rampantdisease, civil war and chronically corrupt, predatory governments.

External liberalisation, it must be emphasised, is not a panacea.Questions of how it is sequenced with other economic and politicalreforms, and whether it should proceed fast or slow, will find differentanswers in different countries at different times. Furthermore, tradeliberalisation on its own may not deliver much. But in interaction withimprovements in domestic institutions there are abundant, long-termgains to be had. External opening creates the spontaneous stimulus forinstitutional upgrading to better exploit trade and investment oppor-tunities, e.g. through better currency and banking practices, and thedevelopment of ports and inland communications. Reciprocally, betterenforcement of property rights and contracts, cleaner, more efficientpublic administration, and more investment in infrastructure, maximisethe gains for importers, exporters, and domestic and foreign investors.Openness, therefore, is a handmaiden of growth, not a quick fix.

What of the international political and policy framework tosupport a freer trading system? Right through the 19th century to1914, national governance, in the context of a decentralised system ofnation states, co-existed with increasing international economicintegration (what we now call globalisation). Has the globalisation-and-governance equation changed that much a hundred years on?Arguably not. It is national governments, not internationalorganisations, multinational enterprises or NGOs, that provide thecore functions of law and public policy. Not least, it is they that decidewhether trade policies are more or less liberal.

This is not to deny the importance of international co-operation

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where national-level action is insufficient. Unfortunately, the record ofmost post-war international economic institutions has been one of adhoc bureaucratic intervention in markets, often exacerbatingmisguided government intervention at home. The 'aid business' is acase in point. The General Agreement on Tariffs and Trade (GATT) wasa notable exception: its non-discriminatory rules and reciprocalnegotiations furthered the liberalisation of trade from the late 1940sonwards.

Looking ahead: World political-economic trends

The crucial difference to globalisation today, and for probably the nexthalf century, is the dramatic opening up of first China and then India.They are the world's second and fourth largest economies respectively(at purchasing power parity), and account for 40% of humanity. Withstill low levels of per capita income, they have the potential for stellarcatch-up growth rates for decades ahead. Their integration into theworld economy, still in its early stages, promises to be moremomentous than that of Japan and the East Asian Tigers, and perhapson a par with the rise of the US as a global economic power in the late19th century.

These trends show that the classical argument for free trade is asrelevant as ever. Trade and related economic reforms enable Chinaand India to better exploit their comparative advantages in a morespecialised international division of labour. Market-based reforms alsoprovide the stimulus for inward investment, the transfer of technologyand skills, and a more competitive, entrepreneurial businessenvironment. These replenishing gains boost growth, which in turnleads to poverty reduction. China's breathtaking reforms have alreadydelivered massive gains. India lags behind, but with glimpses of take-off on the back of accelerating reforms.

The rest of the world gains too. Consumers elsewhere can buycheaper and more varied products. Developed country firms cater toexpanding Chinese and Indian demand for capital- and skill-intensivegoods and services. By 'offshoring' manufacturing jobs to China andservices jobs to India in low-value activities, they can scale up, improveproductivity, and generate better skilled, higher-paying jobs at home.Exporters in other developing countries also discover large newmarkets for oil and other commodities (witness China's voraciousappetite for such imports).

Two other emerging global economic trends will likely move


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centre-stage in years and decades to come: firstly, the cross-bordermovement of labour and, secondly, South-South trade.

First, the freedom of people to move hither and yon in search ofwork was part of 19th century free trade in practice. This was reversedin the 20th century. Now, loosening pervasive restrictions on cross-border labour movement promises huge gains for developing anddeveloped countries. Opening borders to people can only beachieved gradually and piecemeal. It demands political patience andresourcefulness. Nevertheless, it should be at the heart of a 21stcentury free trade agenda.

Second, inter-developing country trade — already 40% of worldtrade — is throttled by the high barriers developing countries erectagainst each other. Significant developing country liberalisation wouldnot only improve own productivity, it would also allow low-incomeand least-developed countries to better exploit their comparativeadvantages by exporting to the fast-growing markets of middle-incomecountries.

. These trends, if not discouraged, will increase the wealth ofnations. They will widen the horizons of individual freedom, especiallyfor hundreds of millions in the developing world who have beencruelly deprived of it. Not least, commercial bonds across theNorth-South divide will make international relations more stable andsecure. But none of this is pre-programmed — the eternal lesson ofsummer 1914. It depends crucially on the right political decisions,nationally and internationally.

Behind every free trade opportunity lurks protectionist danger.Four long-term threats come to mind.

First, organised interests benefiting from protectionism willcontinue to lobby against liberalisation, in both developed anddeveloping countries. Second, the ideological opposition to free tradehas changed form. It now unite's anti-globalisation NGOs with moremainstream critics of globalisation who call for 'global governance' toredress global inequities. Concerted global action to provide aid,enforce 'corporate social responsibility' and harmonise labour,environmental and other standards, seems to have higher priority thanmarket-based reforms in the developing world.

It is the alliance, witting or unwitting, between old-style rent-seeking interests and new-style ideological forces that will present aformidable political threat to free trade in decades to come.

Third, most developing countries are mired in wretched poverty,disease, crime and murderous internal strife. States are failing


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miserably or have collapsed. The old solutions of aid and policy drivenby international organisations have not worked. But these countriesare still ruled by venal and thuggish elites, and lack the history andinstitutions to sustain market-based reforms 'from below'. The dilemmais real; problems are likely to get worse and they will spill over toluckier parts of the world in the form of refugees, illegal migrants andterrorism.

Fourth, the 'low politics' of trade and related economic policiescannot be divorced from the 'high politics' of international security (orthe lack of it). There are new global security flashpoints post-Cold Warand post-September 11, chiefly Islamic fundamentalism and theinternational terror networks fanning out from the oil-rich Middle East.This poses an ever-greater threat to the free movement of people,goods and services across land, seas and skies.

Looking ahead: The case for free trade in the next 50 years

The core political and economic case for free trade, in the service offreedom, prosperity and security, will have equal force 50 years hence.The point is to update it to keep up with ever-changing realities. Howmust it adapt?

First, the post-1945 case for free trade has become too narrowand mechanical. Free trade should burst these chains and return to itsclassical liberal foundations in Smith and Hume.

The Bretton Woods and GATT settlements combined a partialrestoration of 19th century free trade with expanding governmentintervention at home. Post-war trade theory reflected such 'mixed-systems thinking' by decoupling free trade from laisser faire. Inaddition, 'liberalism from above' has prevailed: trade liberalisation hasrelied on international organisations and intergovernmentalnegotiations. Both 'mixed-systems thinking' and 'liberalism fromabove' were politically expedient after the Second World War; but,over time, they have entrenched misguided conventional wisdoms.The first is that Big Government infringements of private propertyrights at home will not flood across borders and overly damageinternational commerce. The second is that international institutionsdeliver trade liberalisation 'from outside', and only through'concessions' to foreigners in a game of haggling.

'Mixed-systems thinking' forgets that free trade is part and parcelof free markets; it is but an element of a constitutional whole thatincludes limited government and laisser faire at home. Of course there

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can be no exact return to a mid-Victorian British social contract,especially in conditions of modern democratic politics. But free tradeshould be recoupled to (qualified, not unbounded) laisser faire. Itstands in contradiction to what Michael Oakeshott calls an 'enterpriseassociation' in which government is an interfering 'estate manager',catering to a super-abundance of rent-seeking interests. Rather it mustfold back into a 'civic association' in which smallish (but notminimalist) government provides essential public goods.

Furthermore, 21st century free trade should rely less on 20thcentury 'liberalism from above' and more on 19th century 'liberalismfrom below'. With the latter method, the liberalisation impulse comesfrom national governments acting unilaterally (or autonomously), andspreads internationally by example (or competitive emulation).Unilateral free trade makes economic sense, since welfare gains comequicker from own, unconditional import liberalisation than they dofrom protracted international negotiations. It makes political sense too.Governments have the flexibility to initiate policies and emulate betterpractice abroad in experimental, trial-and-error fashion, tailored tospecific local conditions. The WTO and bilateral/regional tradeagreements can be helpful auxiliaries in advancing a liberalisationagenda, but they are poor substitutes to what David Landes calls'initiation from below and diffusion by example'. Their importanceshould not be exaggerated.

Second, Western governments and intellectuals, on the right andthe left, seem to prioritise démocratisation in the Third World, partly inthe belief that it will promote economic reforms. The evidence ismixed at best. In China and several other East Asian countries, market-based reforms, including trade and investment liberalisation, haveoccurred under authoritarian governments. In much of the rest of thedeveloping world, illiberal démocratisation has reinforced economicpolicies that promote cartels and protectionism, and it has stunted thebuild-up of market-supporting institutions. Economic and relatedinstitutional reforms (such as internal and external liberalisation, andthe enforcement of private property rights and contracts) should havetop priority in China, Russia, Iraq, Afghanistan and elsewhere. This iswhat the West — particularly the US — should be encouraging. Politicaldemocracy should be allowed to emerge gradually and organically inthe wake of economic growth and institutional development, as it hasdone in South Korea and Taiwan.

Third, free trade must work with the grain of wider geopoliticalrealities. There have been marked shifts in international politics since


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the end of the Cold War, and more recently after September 11. Noserious challenge exists to US leadership abroad; Europe and Japan areinternally sclerotic and externally pusillanimous; other powers are onthe rise, notably China, India and Brazil; the transatlantic alliance is.nolonger the fulcrum of international relations; and politics andeconomics are moving inexorably in an Asia-Pacific direction, from theIndian Ocean to Tierra del Fuego.

The one constant in this shifting political template is US leadership.For the foreseeable future, the US will remain the indispensable anchorfor global security, prosperity and freedom — far more important thanany international organisation or international treaty. It is vital that itleads from the front: in securing the global Pax against systemicsecurity threats; in helping to rescue and reconstruct failed states; inmaintaining open and stable international financial markets; and, notleast, in breaking down barriers to trade, investment and themovement of workers across the world. Above all, the US must leadby example, setting the standard for liberal economic policiesworldwide by what it does at home. This includes untying existingknots of domestic protectionism.

There will be times when the US will have to resort to unilateral'liberal imperialism' when international institutions dither and fail.Otherwise 'liberal internationalism' — the multilateral co-operationenvisaged by Woodrow Wilson and Cordell Hull — should prevail. TheGATT/WTO has been its foremost and most successful expression onthe economic front. Robust US leadership is sine qua non to the futurerelevance and workability of a presently crippled WTO. However, theUS will need like-minded coalitions inside the WTO and outside it. Inthe future they will be found less across the Atlantic and more in Asia-Pacific, especially China. Not only must the US lead by example athome: it must also display the enlightened sensibility to construct andmaintain genuinely two-way 'coalitions of the willing' abroad. Freetrade's future depends on it.

Conclusion

The power of ideas should not be underestimated. John Stuart Mill didsay that 'a good cause seldom triumphs unless someone's interest isbound up with it'; but he also remarked that it is 'the word in season,which, at a critical moment, does much to decide the result'. It falls tofree trade's friends to spread their word in season with global politicalcurrents, anti-protectionist interests (such as exporters, downstream


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users of imported inputs, multinational firms with global productionnetworks) and (often unanticipated) events.

Historically, free trade has needed its commanding publicchampions. Cobden, Bright and Gladstone filled that role in VictorianBritain, as did Hull and Ludwig Erhard in the last century. There areprecious few around today.

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free trade: the next 50 years

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