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The bluff of free trade: Trump’s trade wars expose an abiding truth

After a short-lived experiment with trade liberalisation, which resulted in a billion trade deficit with China, India today has retreated into its old protectionist crouch.

By Pankaj Mishra  

As the year ends, a partial and brief ceasefire seems imminent in Donald Trump’s trade war on the world. The US and China may sign a deal as early as next month. But make no mistake: The protectionist impulse behind the trade war remains as ineradicable as ever. Nor should it be forgotten that economic nationalism has guided the destiny of all major nations since the 19th century. According to the ideological prejudices of the present, built up over four decades of globalisation, free trade and deregulation represent the natural order of things. History, however, tells us that the US was a protectionist power for much of its existence, and the tariff was a crucial factor in its dethronement of Britain as global economic leader by the early 20th century. As William McKinley put it in 1890: “We lead all nations in agriculture; we lead all nations in mining; we lead all nations in manufacturing. These are the trophies which we bring after 29 years of a protective tariff.”

The argument for economic nationalism against a manufacturing giant such as Britain was simple. British free-traders claimed that their ideology was best placed to bring prosperity and peace to the world. Their critics in countries less economically advanced than Britain, such as Germany’s Friedrich List, the 19th century’s most influential economic theorist, argued that free trade could only be a goal rather than the starting point of modern development. Economic self-strengthening for nations required they protect their nascent industry until it becomes globally competitive.

Notwithstanding Britain’s rhetoric, which periodicals like the Economist amplified, it had arrived at free trade after a successful policy of tariffs. It also used military power to acquire foreign markets for its surplus goods and capital.
In the late 19th century, one aspiring power after another set out to match the British; the Americans were not alone. Italy, while seeking to modernise its economy, imposed massive tariffs on France. Germany and Japan nurtured domestic manufactures while trying to shield them from foreign competition. Even Britain, following its settler colonies Australia, Canada and South Africa, came to abandon free trade by 1932. The US’s protectionism peaked with the infamous Smoot-Hawley Tariff Act of 1930. The US moved swiftly to embrace free trade after the Second World War only because its manufacturing industries, dominant over the world’s war-ravaged economies, needed access to international markets.

Even then the Cold War’s military and diplomatic urgencies turned the US into an unlikely protector of Japan’s manufacturing industries as they were rebuilt into world-beaters. Trade practices of the kind deemed unfair by Trump today—from loans and subsidies to national conglomerates and restriction of imports—were key to the rise of not only Japan but also such East Asian “tigers” as South Korea and Taiwan.

Trying, albeit much less successfully, to build a manufacturing economy, India imposed some of the world’s highest tariffs. After a short-lived experiment with trade liberalisation, which resulted in a $53 billion trade deficit with China, India today has retreated into its old protectionist crouch.

The rise of China as a manufacturing powerhouse has made even the US renounce the posture of international cooperation it assumed after the Second World War. Multilateral institutions such as the WTO that the US helped set up no longer seem to serve its purposes. Moreover, the argument, first widely heard in the US during the debate over NAFTA in the 1990s, that free trade enriches the wealthy at the expense of the poor and the middle class, not to mention the environment, has become politically much more potent.

It is clear the advocates of free trade ignored for too long the volatile political problems rising from wage stagnation and income inequality. Upholding the economic law of “comparative advantage,” they also managed to downplay the higher law that governs international economic relations: might is right.

Following the British “imperialism of free trade,” powerful countries have practised what they denounce in others. For instance, the US, while insisting that other countries reduce state intervention, has nurtured high-tech industries in ways that violate WTO agreements.

The bluff of free trade, first called in the 19th century by an industrialising America against Britain, lies exposed yet again as China aspires to be the 21st century’s new hegemon. Free trade turns out to be something that helps a rising great power, until it doesn’t, and which most countries claim to practice while trying to subvert its principles as much as possible.

Trump’s trade wars are, of course, dangerously reckless in a world more interconnected than ever. But they have served to clarify the challenge ahead: to devise multilateral institutions that acknowledge protectionism rather than free trade as the deeper and more enduring reality of global economic history.

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Source: Financial Express