New Frontiers in Free Trade

Globalization's Future and Asia's Rising Role

Razeen Sally

• Publisher: Cato Institute
• Year: 2008
• Print ISBN: 9781933995212
• eBook ISBN: 9781933995960
• Topic: Politics & International Relations
• Subtopic: Exports & Imports
• Index: Politics & International Relations

Razeen Sally argues that international trade policy has lost its way. Trade policy has become disconnected from 21st century business and consumer realities. The World Trade Organization and free trade agreements have outdated negotiating models and yield diminishing returns. The world's fastest growing economies are those in Asia that have embraced freer trade and global integration unilaterally, without waiting for trade negotiations.

Hence, the priority should be bottom-up unilateral liberalization, with China's opening to the world economy leading the way and setting the example for others in Asia and beyond. Liberalization should now focus more on domestic regulatory barriers. The post-Doha WTO will still be important, but more as a forum for strengthening trade rules than for driving further liberalization. The biggest danger, though, is complacency and "reform fatigue," which threatens to halt globalization's advance.

Sally makes a vigorous case for the benefits of free trade and provides a penetrating analysis of the dangers confronting the world trading system. Inspired by the precepts of Adam Smith and David Hume, he sets out practical prescriptions for getting trade policy back on the rails as part of a refreshed agenda for freer trade and freer markets that is relevant to the rise of Asia and 21st century globalization. Informative; well-argued; and, above all, highly readable, this book is a stimulating contribution to the emerging debate on where trade policy should go in the post-Doha world.

1. A Short Introduction

Not that the story need be long, but it will take a long while to make it short.

—Henry David Thoreau

Western influence on the world, though still great, is declining. Eventually our societies will be the minor partner in the terrestrial enterprise. What do we want the majority to believe about the liberal idea that animated the West’s historical achievement and that we continue to profess, but have, in recent decades, ceased to act upon? What kind of world will it be, if the majority comes to believe that the idea is a sham?

—Jan Tumlir

This is a little book on a large subject: trade policy in the early 21st century. It has two objectives. The first, in the spirit of Thoreau’s quote above, is to keep it short. My intention is not to write another bulky tome on the World Trade Organization, free trade agreements (FTAs), and other aspects of trade policy. Rather, it is to capture big trends, sum them up concisely, and communicate directly and engagingly to a broad audience of interested readers.

The second objective is to give my account a non-Western, especially Asian, slant—hence the headline quote from Jan Tumlir, who was for a long period of time the director of research at the General Agreement on Tariffs and Trade and its informal in-house philosopher. The classic themes of trade policy, revolving around free trade and protectionism, originated in the West and have been framed by the West for the rest of the world. But the major challenges facing trade policy today come increasingly from outside the West, and particularly from a rising Asia. The 21st century, so we are told, is the Asian century.

Now, for a little background to give a sense of this book’s ‘‘mental atmosphere’’ (one of George Orwell’s favorite terms). My last book, Classical Liberalism and International Economic Order, is an intellectual history of free trade vs. protection, as seen in the classical-liberal tradition from David Hume and Adam Smith to F. A. Hayek. The grand, universal themes addressed in that big book frame the picture for this little one. What is the relevance of free trade (or freer trade) today? What is its role in modern globalization? What are the existing and emerging protectionist threats, ideological and material, to open commerce across national borders? Why is it important to counter them? How can a freer-trade agenda be put into practice in the years and decades ahead?

In this first decade of the new century, I have worked mostly on current trade-policy issues: the WTO and its Doha round; FTAs, especially in Asia; and other trade-policy developments in China, India, and southeast Asia. This has been a mix of academic and think-tank writing, consultancy projects, and opinion pieces for newspapers. Through such variety, I have come to think of myself less as a ‘‘normal’’ academic and more as what Ralf Dahrendorf calls a ‘‘straddler’’—someone at the junction of academic research, policy, and opinion formation. I hope my straddling has been seasoned by the truly empirical experience of work and travel across Asia in particular.

Hence, as a straddler, I lay this book before interested and intelligent readers: practitioners keen to rise above day-to-day events and policy minutiae; academic experts with a practical bent and an interest in the real world; and general readers simply concerned about the issues covered. This book is not intended for the overspecialized, head-up-rear-end nerd.

Finally, here is the batting order for the chapters that follow. Chapter 2 provides a potted intellectual history of the debates on free trade and protection, from classical antiquity to the late 20th century. It is intended to shed light on the big trade-policy questions of today and tomorrow.

Chapter 3 is on the political economy of trade policy. It looks at the state of play in trade policies, especially across the developing world. Then it examines the driving forces of trade-policy reform: crises, interest groups, ideas, institutions, and factor endowments. Then follows a section on trade policy on different tracks: unilateral measures, the WTO, FTAs, and the role of foreign aid. Finally, it sets a broad agenda for further liberalization and associated structural reforms—in a difficult political climate in which skepticism about liberalization and globalization has been on the rise.

Chapter 4 is on the WTO. It covers the transition from the GATT to the WTO, and then developments in the Doha round. It defends a framework of multilateral trade rules, but makes the case for more realism and modesty in a post-Doha WTO. That demands a shift in the focus of WTO business, and changes to WTO decisionmaking. The United States and China will have to lead necessary changes if the WTO is to retain relevance and avoid marginalization.

Chapter 5 is on preferential trade agreements (PTAs). Its focus is on the recent proliferation of PTAs in Asia, which is playing catchup with the rest of the world. Nearly all PTAs are ‘‘trade light’’ and of little commercial value. They do not threaten to break up the global trading system, as happened in the 1930s. But they are not vehicles of genuine regional and global economic integration, and they are storing up political and economic complications.

Chapter 6 makes the case for unilateral liberalization in the 21st century, arguably more important as a liberalization vehicle than the WTO or PTAs. China is now the engine of unilateral liberalization in Asia and beyond, and it is vital that this engine does not sputter and stall. That depends on a combination of internal and external political and economic conditions.

Chapter 7—the concluding chapter—looks ahead to the next few decades. It makes the case for free trade in the new century. It highlights emerging issues that will come to dominate trade policy, and looks at the role of ‘‘governance’’ at national and global levels. It argues that free trade should fold back into a Smithian classicalliberal framework. The case for free trade should again be made as part of a package of individual freedom, limited government, free markets, and unilateral liberalization. That, however, cannot be realized in a vacuum: it depends on a stable international political order. That in turn depends on constructive U.S. leadership; good bilateral relations between the United States and other powers; and realistic, workable multilateral institutions.

2. Free Trade vs. Protection

The doctrine of free trade, however widely rejected in the world of policy, holds its own in the sphere of the intellect.

—Frank Taussig

All theory is grey, my friend, but green is life’s glad golden tree.

—Goethe, Faust, Part 2

The two quotes above signal the polar extremes in the debates for and against free trade. Since Adam Smith, classical and neoclassical economists have proclaimed the superiority of free trade in theory. The American economist Frank Graham called it ‘‘a ubiquitous and timeless principle.’’ To Stanley Jevons it was ‘‘a fundamental axiom of political economy.’’ At the other end of the spectrum, implacable opponents of free trade, from counter-Enlightenment Romantics such as Carlyle and Ruskin to today’s anti-globalization postmodernists, reject it on anti-economic grounds. It is a product of the ‘‘dismal science’’ and the ‘‘quackery’’ of economists, as Carlyle put it. It is a bloodless laboratory experiment, they say; a utopia grafted onto the human skin, with damaging social consequences.

The free trade vs. protection debate is not as Manichean as the views above suggest. The reality, of course, has shades of gray in between. This chapter tries to get a sense of where thinking on the issue stands today. It does so via a potted history of ideas. The controversies swirling around free trade and protection are first traced back to their roots in classical antiquity and brought forward to the Middle Ages. Then follows a section on mercantilism pre–Adam Smith. After that comes the emergence and establishment of free trade doctrine in classical political economy, especially in the writings of Adam Smith and David Hume. Then follow 19th-and 20th-century developments.

The purpose of this roundabout method is to avoid a shallow repetition of current—and mostly ahistorical—arguments pro and contra free trade. Intellectual history, hopefully, will give us a wider, but also less superficial, panorama of this central debate in early 21st-century globalization.

From Classical Antiquity to the Middle Ages¹

Political, philosophical, ethical, and legal arguments for and against free trade have existed since ancient Greek and Roman times. But these are all noneconomic or metaeconomic arguments. Economic analysis—the systematic observation and interpretation of how economic phenomena interact—came much, much later in the mercantilist tradition.

The leading and oldest noneconomic argument in favor of free trade—namely, that it leads to international peace—probably originated in an early Christian ‘‘universal economy’’ tradition. It had a cosmopolitan outlook and welcomed unfettered trade across the seas as a means of bringing about better contact, understanding, and friendship among peoples, eventually leading to the universal brotherhood of man. This was seen as a sign of beneficent divine intervention. In the Middle Ages, natural-law theorists, from Vittoria and Suarez to Grotius and Pufendorf, regarded free trade as part of the jus gentium, the law of nations. The 18th-and 19th-century classical liberals, along with Immanuel Kant, made an explicit connection between free trade and international peace. Richard Cobden was perhaps the most powerful advocate of free trade as the central means of ensuring peaceful international relations. That idea carried forward in the thinking of Woodrow Wilson and Cordell Hull. The latter, arguably, was the spiritual father of the post-1945 multilateral trading system. As he declared: ‘‘Unhampered trade dovetails with peace; high tariffs, trade barriers and unfair economic competition with war. . . . I will never falter in my belief that enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade.’’²

Protectionist arguments—again overwhelmingly noneconomic—were probably more influential down the ages. Plato and Aristotle embodied a Greek political-philosophical tradition that denigrated economic activity as something for social inferiors, especially women and slaves. Politics was the superior, virtuous activity, the preserve of male citizens in the polis. The latter was supposed to be politically self-contained, for which it had to be economically self-sufficient, save for trading in necessities. That meant minimal contact with foreigners.

Finally, much Christian thought over the centuries had an antieconomic streak, with a bias against foreign trade. The latter supposedly inflames the vices of worldliness and avarice. It pulls people away from the religious life, which is intimately bound up with ascetic virtues.

Mercantilism³

Mercantilist thinking dominated in the two centuries before Adam Smith’s publication of The Wealth of Nations, in Britain, France, and elsewhere in Europe. Economic analysis emerged slowly and imperceptibly during this period, though Schumpeter says that mercantilism was essentially ‘‘preanalytic’’: its proponents were mostly pamphleteers full of assertions, opinions, and axes to grind, not dispassionate analysts.

Mercantilism’s political context was the ascendancy of the Westphalian system of nation-states. Kings and princes were in the business of nation-building. They projected their power within by centralizing control over domestic societies and economies, and projected their power externally in warlike international relations, not least to grab or defend overseas territory. In the economic sphere, the self-interested, profit-seeking merchant, and wealth creation more generally, were increasingly welcomed—a radical departure from antecedent attitudes. But it was considered folly to leave merchants to their own devices. Rather, the state had to ensure that self-interested behavior was guided, deliberately and forcefully, so that it served national interests. It was incumbent on the state to make trade flow in the ‘‘right’’ channels while avoiding the ‘‘wrong’’ channels. Hence, notwithstanding a ragbag of diverse and often conflicting views within the mercantilist canon, its organizing principle was raison d’e´tat.

Mercantilism had at least five main planks: the accumulation of specie; a favorable balance of trade; promotion of infant industries; the belief in an international zero-sum game; and the preservation of domestic stability.

First, some mercantilist writers sought to accumulate specie (gold in particular) in the national exchequer through maximizing exports and minimizing imports. They considered a hoard of specie to be a leading indicator of national wealth. It was also ‘‘the sinews of war,’’ a repository of funds to pay mercenaries and fight wars. The accumulation-of-specie argument is now considered outdated, even by modern-day mercantilists.

Second, many (perhaps most) mercantilists advocated a healthy trade surplus by means of export promotion and import protection—mercantilism’s ‘‘two great engines,’’ according to Adam Smith. Many considered this the leading indicator of national wealth. As Thomas Mun, a leading English mercantilist, put it, ‘‘The ordinary means therefore to encrease our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value.’’⁴

Thus, intervention in foreign trade, through customs duties, bounties, quotas, foreign exchange controls, and outright bans, was to complement a panoply of internal controls on production and consumption.

Third, from Elizabethan times onward, mercantilists favored the promotion and protection of infant industries to kick-start industrialization. Manufacturing was considered a superior wealth generator to agriculture and other forms of economic activity.

Fourth, mercantilists generally believed in Hobbesian international politics and economics. One nation could only gain at the expense of other nations, since international wealth was finite.

Fifth, domestic social stability was a mercantilist imperative. Foreign trade had to be controlled precisely because, if left uncontrolled, it would disrupt the domestic social balance.

‘‘Mainstream’’ economists, from David Hume and Adam Smith to Eli Hecksher and Jacob Viner, have gone out of their way to dismiss mercantilism’s central planks as economic nonsense. A trade surplus (or deficit), in isolation, does not tell us anything, and it is certainly not a good indicator of national wealth. Manufacturing is not intrinsically superior to other forms of economic activity. And international trade, if governed by market forces, is a positive-sum game that delivers all-around gains. Hence Paul Krugman’s dismissal of mercantilist shibboleths as ‘‘pop internationalism.’’ To David Henderson, this is ‘‘do-it-yourself economics.’’ Nevertheless, with the exception of the archaic accumulation-of-specie argument, the main tenets of pre–Adam Smith mercantilism endured into the 19th and 20th centuries, and are alive and well today. They retain powerful ideological appeal.

The Emergence of Free Trade Doctrine⁵

The economic defense of free trade, as opposed to its defense from noneconomic standpoints, only got going in the 18th century. In the interstices of mercantilism, several writers had insightful flashes of the benefits of an unrestricted international division of labor, with, at its core, the interdependence of self-adjusting imports and exports, and of trade and payments. Some came close to saying that free trade, not protection, delivers a superior gain with regard to national wealth creation. Charles Davenant expressed this position pithily, ‘‘Trade is in its nature free, finds its own channel, and best directs its own course: and all laws to give it rules and direction, and to limit and circumscribe it, may serve the particular ends of private men, but are seldom advantageous to the public.’’⁶

This turned the mercantilist presumption—that the state should direct trade into ‘‘good’’ and not ‘‘bad’’ channels—on its head. It set up the principle of nonintervention in trade, akin to the French physiocrats’ governing principle of laissez faire.

Now it is time for Adam Smith to enter the scene. His genius was not originality; rather, it was to draw on a range of thought before him, seasoned with acute observation of history and the world around him, to come up with a sweeping synthesis of the economic system and its interrelated parts. The result was his Inquiry into the Nature and Causes of the Wealth of Nations. He drew particularly on preceding economic analysis (from the physiocrats, for example) and his own Scottish-English tradition of moral philosophy.

The governing principle of the Smithian economic system is ‘‘natural liberty’’ (or nonintervention), which allows ‘‘every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.’’ And as Smith went on to say, ‘‘All systems of preference or restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord.’’⁷ Thus, self-interest (broadly conceived), if left to its own devices, conduces to the public good, particularly by maximizing the wealth of the nation. The crucial qualification is that this is not a vision of anarcho-capitalism or unadulterated laissez faire. Rather, it depends fundamentally on an appropriate framework of rules (‘‘justice’’ in Smith’s terminology), which the state is charged with instituting, updating, and enforcing.

Smith extended this economic system animated by natural liberty from the domestic to the international sphere, from intranational to international trade. Book 4 of The Wealth of Nations laid out a comprehensive system of international trade, with a many-sided defense of free trade that remains unsurpassed. Smith’s contemporary and close friend David Hume wrote some brilliant sketches on international trade,⁸ but it was Smith who furnished the overarching system.

Free Trade in Hume and Smith: An Elaboration⁹

By the end of the 18th century, free trade had become the established presumption in Scottish-English political economy. British policy at the time, however, was still largely protectionist; and the political-economy consensus outside Britain still favored protection over free trade. Let us now probe deeper into the classical-liberal system of free trade in Hume and Smith.

Both Hume and Smith made a full frontal attack on mercantilism as their point of departure. Hume’s attack was directed at the accumulation-of-specie argu...

Table of contents

• 1. A Short Introduction
• 2. Free Trade vs. Protection
• 3. The Political Economy of Trade Policy
• 4. The World Trade Organization
• 5. Preferential Trade Agreements
• 6. Asia, China, and Unilateral Liberalization
• 7. Conclusion: The Future of Free Trade
• Notes