Commentary Magazine


Arguing for Free Trade

There are two scenarios for world trade in the 21st century, an optimistic and a pessimistic one. The optimistic scenario is the one which, almost unthinkingly, most of us subscribe to.

It goes as follows. World trade will continue to expand, faster or more slowly according to which phase of the cycle we are in. Notwithstanding such diversions as the recent skirmish between the United States and Japan, trade barriers will continue to come down as they have done for the past half-century. The world will move toward a tripartite trading system. The North American Free Trade Area (NAFTA) will eventually expand to take in all of Latin America. The European Union (EU) will embrace all of Eastern Europe, including Russia. The East Asian trading area will be represented by Japan, China, Southeast Asia, and finally India. Then, progressively, these three big trading groups, having largely abolished internal tariffs among themselves, will negotiate external tariff reductions as well, and we will gradually move toward a unified world-trading system some time in the second half of the 21st century.

Surely all sensible people want this to happen, and most people believe it will. But it will not happen if we leave it to fate—for the simple reason that to trade freely is not a natural human propensity. Although international trading has existed on a substantial scale for 7,000 years, free trade, for all practical purposes, is a late-18th-century invention, and one which made progress in the 19th century only because determined men pushed it forward vigorously. In the 21st century we could go horribly awry.

For there is an alternative scenario waiting to happen, and it goes as follows. Early in the 21st century, the federalists in the European Union will get their way, creating a European superstate with a single currency and a single economic policy. Building on the Social Charter, which imposes a large number of expensive obligations on European companies, the EU will set up an internal welfare state, financed not only from the overall federal budget but by more or less compulsory contributions from the private sector. The consequence will be to raise unit costs for EU goods and services to the point where they become uncompetitive in world markets—a process which has, indeed, already begun.

In this scenario, the mercantilists within the EU (again, already quite influential) will take over policy wholly. In a classic mercantilist maneuver, the EU will not only push up its external tariffs but will adopt a system of both open and hidden subsidies for its manufacturers, especially its high-tech exporters. This new anti-free-trade approach will be justified pragmatically, but clever writers will also come forward to argue against free trade on the idealistic grounds that it destroys peasant societies and craft industries, fragile and irreplaceable cultural traditions, and, of course, the environment. Once established and made intellectually and emotionally respectable, the green-tinctured mercantilism of the 21st century will find enthusiastic followers everywhere, who will link arms with domestic-industry lobbies and trade unions to demand protection.

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Even North America will not be immune, for it should not be forgotten that all three constituents of the new Free Trade Area have protectionist traditions of their own.

The United States, to begin with, is itself a comparatively recent convert to free trade. Ever since, in 1791, Alexander Hamilton’s Report on Manufactures urged the adoption of systematic protective tariffs to foster native industry—using exactly the same arguments current in Europe today—the U.S. has had an instinctive urge to resort to protective measures, especially in times of trouble. (Until World War II, in fact, it was a high-tariff nation.) To the north, while English-speaking Canadians tend to be free-traders, French-speaking Quebecers are fanatical mercantilists. To the south, many of the same Mexicans who favor free trade in order to get access to U.S. markets would not oppose a high external tariff to keep out cheap Asian exports.

Thus, it is not hard to envision NAFTA reacting to a high European Union external tariff by imposing similar barriers of its own, in effect spelling the end of the General Agreement on Trade and Tariffs (GATT).

And what about Asia in this scenario? Aside from former Western colonies like Hong Kong, Singapore, and Macao, genuine free-traders are thin on the ground there. Most Japanese, Chinese, and Indian intellectuals believe—and so it is taught in their schools and universities—that the West tried to impose free trade on Asia to destroy its native industries. If the “white” EU and NAFTA impose big external tariffs, Asians will be quick to react in hostile fashion, speeding up progress toward a tightly organized trading federation and digging in behind a high barrier of their own.

And so—the pessimistic scenario concludes—the three great trading groups, far from moving closer together to form eventually a single system, will move violently apart, to become, respectively, Fortress Europe, Fortress America, and Fortress Asia. This, indeed, was the vision of George Orwell in Nineteen Eighty-Four. That book is rightly remembered for its dark forecast of an entirely totalitarian future, which miraculously has not come to pass (in part because Orwell’s warnings were heeded). But Orwell also foresaw the dangers of a world divided into three implacably hostile blocs, refusing to trade with one another and habitually at war. This aspect of his prophecy, now forgotten, bears an uncanny resemblance to what lies in store according to the pessimistic scenario of the 21st century.

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High external tariffs do not necessarily lead to tariff wars; but historical experience shows that they often do. Similarly, tariff wars need not lead to cold wars, let alone to hot wars; but, again, experience shows that they can. Although very few Americans may remember the Smoot-Hawley Tariff of 1930, it was an important event in world history—and it has some claim to be regarded as the most disastrous piece of legislation ever enacted by Congress.

By raising tariffs to combat the growing Depression, Smoot-Hawley left other nations with little choice but to embark on a similar series of beggar-thy-neighbor policies. World trade declined sharply, thus deepening the Depression: even in 1939 it was smaller in value and volume than it had been in 1914. There is no doubt that the dire economic repercussions of these trading wars contributed to the vicious international tension which led directly to World War II. Certainly, without the trade factor it is most improbable that Japan and the U.S. would ever have come to blows.

How to guard against such tariff competition taking place again? One way is to ensure some kind of overlap among the three great trading blocs. Here, my own country has a crucial role to play.

The internal politics of the European Union are little understood in America, and the part Britain takes in them is hardly understood at all. Most Americans harbor a vague desire that European federation succeed, and insofar as Britain resists federation it is seen as a nuisance. President Clinton has more or less registered this view explicitly.

Admittedly, the fact that the British political parties are hardly at one on this issue does not help matters. Yet, however haltingly, Britain is waging a fight within the EU, not so much against federalism as against what I have called Fortress Europe. For just as the French invented mercantilism, Britain invented free trade, and these two principles are still at war in the chambers of the EU in Brussels. In brief, Britain wants the EU to be outward-looking with low and falling external tariffs, not inward-looking with high and rising ones.

If, as looks increasingly likely, Britain loses this battle and becomes a tame and dutiful part of Fortress Europe, the pessimistic scenario will become so much the more probable. But there is also the possibility that the EU might divide into two categories: a fast-track group moving swiftly toward the European superstate and a group, including Britain, whose primary interest would be in creating a European free-trade area. If that should happen, the way would be open for Britain, plus other EU members like Portugal and non-EU states like Norway, to seek entry into NAFTA, whose initials would then signify not the North American but the North Atlantic Free Trade Area.

I myself see no reason why Britain could not belong to both the EU and such a new NAFTA. Indeed, there would be distinct advantages all around in having a major exporting nation acting as a bridge between the two groups, and thus pointing the way toward the general tariff reductions which might eventually bring about a merger between them. Britain has served as a pilot-nation before in history, promoting the rule of law, parliamentary institutions, the industrial revolution, and of course free trade itself. If it succeeds in the present case, the balance might in the end be tipped away from the pessimistic scenario and toward the optimistic one.

It goes without saying, finally, that Britain can only play this role successfully if it has the cooperation and the active encouragement of the United States. As in every other major area of global politics, the future of world free trade depends in the final analysis on an imponderable: whether and whither America leads.

About the Author

Paul Johnson is the author of Modern Times, A History of Christianity, and A History of the Jews, among many other books.




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