The new order of commerce
THIS DIARY was founded in 1843 to campaign for the repeal of British protectionist corn laws (which was carried out three years later). The argument for free trade was that tariffs enrich the rich to the detriment of the poor, and that discrimination against foreigners leads to mock retaliation, making it worse for everyone. Our introductory issue lamented that governments, classes and individuals “have been too inclined to conclude that their advantage could be secured by a policy detrimental to others.”
For more than 200 years, economists have widely accepted such arguments, although some politicians have shown an atavistic penchant for protection. But after 1945, most of the world’s leaders converged in favor of freer trade. Carried away by the idea that more open markets promote innovation, competition and growth, they pursued them, first in the General Agreement on Tariffs and Trade (GATT), founded in 1948, then after GATT was transformed into the World Trade Organization (WTO) in 1995.
The WTO was an extraordinary achievement. For the first time – and almost only for international institutions – the system included binding dispute resolution, so that victims of rule violations could obtain redress. Large countries could no longer carry their weight and assume that any harm done to others was inconsequential. Such was the faith placed in the new institution that, when China belatedly joined it in 2001, many Westerners hoped it would lead to economic and political convergence with wealthy democracies.
Exceptions were allowed in the rules-based system, but they were carefully controlled. One for national security was used sparingly, as everyone saw that it could all too easily be abused. Environmental protection was allowed to justify some trade restrictions, but no more than was absolutely necessary. Union lobbyists complaining of unfair competition were denounced as protectionist by those who viewed cost differentials as legitimate forms of comparative advantage. Indeed, economic integration was seen as a way to help achieve these other goals. Not only would economies benefit from being linked together, faster growth would mean higher environmental and labor standards.
All of this has resulted in generally lower rates. Between 1990 and 2017, the trade-weighted average world tariff applied according to WTO the rules are down 4.2 percentage points. The decline was greatest in the poorest countries: over the same period, China’s tariffs fell by 28 points, India’s by 51 points, and Brazil’s by 10 points to 300 in 2019. These reduced applied trade-weighted tariffs by an additional 2.3 percentage points.
This system has supported an explosion in world trade as a percentage of gross output, from around 30% in the early 1970s to 60% in the early 2010s. During the same period, complex global supply chains are emerging. increased from around 37% to 50% of total trade. The meteoric collapse in transport costs boosted international trade. But also stability. After China’s accession to the WTO, a study by Kyle Handley of the University of California at San Diego and Nuno Limão of the University of Maryland found that the reduction in uncertainty was responsible for about a third of the growth in Chinese exports between 2000 and 2005.
As these early activists predicted, freer trade improved living standards. A 2019 World Bank report concluded that a 1% increase in participation in global value chains is linked to an increase in per capita income of more than 1% in the long run. A review of the literature by Douglas Irwin of Dartmouth College found that poor countries that liberalized trade experienced higher growth by 1 to 1.5 percentage points, reaching 10 to 20 percent after a decade. The United States International Trade Commission, an independent government agency, estimates that the United States’ bilateral and regional trade agreements increased real revenues by 0.6%.
Stretch and protect
Some movements towards further liberalization have continued. In November 2020, 15 Asia-Pacific countries signed the Regional Comprehensive Economic Partnership, the world’s largest trading bloc. Trade in the African Continental Free Trade Area, an agreement ratified by 38 countries, began on January 1 of this year. Post-Brexit Britain is trying to cover 80% of its trade with preferential deals, albeit after erecting significant new barriers with its closest neighbor, the European Union. And America and the EU discuss common international standards for the digital economy.
Yet the appetite for freer trade is not what it used to be. There has not been a general round of liberalization since the mid-1990s. Other transactions have also slowed down. This is in part due to a widespread perception that the free trade ideology has failed to deliver on its promises. In the rich world, politicians have seen furious backlashes against trade deals and complaints that liberalization has created losers as well as winners, leaving many workers behind. President Donald Trump embodied a rejection of the rules-based trading system. While the Biden administration is no longer making random tariff threats, few believe America is unable to elect a protectionist like Mr. Trump again.
Meanwhile the WTO faces traffic jams. Many believe that China has taken most of the promised benefits without offering enough in return. It has become impossible to update the rules in a group of 164 members who all have to agree. And the system that was supposed to keep trade disputes from spiraling out of control no longer works. The covid-19 pandemic has revealed how quickly panicked nationalism can mess up global supply chains. More than two-thirds of countries applying medical device export controls in 2020 still had restrictions in place as of August 2021.
Despite all the support for post-war free trade, political support for it appears to be on shaky foundations. This could jeopardize growth. Uncertainty associated with Mr. Trump’s trade wars may have depressed global growth by 0.75 percentage points in 2019, according to a study. WTOeconomists estimate that between 2000 and 2016, the cost of trade associated with the policy fell from the equivalent of a 9% duty in 2000 to a 6% duty in 2016, but this includes a slight increase since 2012. A simulation of the IMF found that the equivalent of a 10% tariff would reduce world production by around 1% after three years, and by 1.5% if one adds productivity losses due to the protection of inefficient firms.
As freer trade loses favor, other priorities have multiplied. There was so much emphasis on liberalization and what it would bring that over time “trade has become a matter of negotiation – trade for the sake of trade,” says Ngozi Okonjo-Iweala, director general of the WTO. Now, she notes, the non-trade objectives that had lost the cause of further liberalization are coming back. This special report explores how trade policy is used to achieve non-trade goals, including greater resilience, human rights and a healthier planet. And he wonders if the open trading system can survive this change. The starting point is to examine the tensions created by America’s diversion from the rules-based multilateral trading system it did so much to create.■
Full content of this special report
World trade: the new trade order*
Commercial law: a crumbling system
Precautionism: In search of resilience
Labor rights: the need to protect
The environment: making commerce greener
The new rules: a changed world
This article appeared in the Special Feature section of the print edition under the title “The New Order of Commerce”