Free trade is dead

by IAN OAKLEY

President Trump has just released a new trade plan, as part of his campaign to return to the Presidency in 2024. It does not make easy reading for the supporters of global free trade: it wishes to see universal tariffs introduced on US imports and a virtual end to trade with China by 2029. At the same time Republicans in the House of Representative propose a bill to ban the Chinese social media app Tik Tok. Meanwhile the EU mulls vast subsidies to industry to compete with the US in green technology. In the UK the Truss idea of rolling trade deals has turned to dust. Where did it all go wrong for the free traders? The turning point was 2016, the year the free trade dream began to die.

In the heart of a certain type of Brexiteer, leaving the EU was the key to Britain returning to its free trading nineteenth century roots. Free of the dead hand of Brussels, the UK would set sail across the world and sign trade deals here, there, and everywhere. The USA? Yes. India? Definitely. China? Why not? Of course, as with most utopian projects, this did not happen. There is a (bad) trade deal with Australia, trade deals rolled over from our EU membership and an Indian trade deal that never seems to quite happen.

The first step to the collapse in the free trade order was the Brexit referendum, which led to the severing of the European Single Market into the UK and the rest of Europe. The next step — and the one with the most global significance — was the election of Donald Trump as the 45th President of the United States in November 2016.

Trump’s first act as President was to withdraw from the Trans-Pacific Partnership — a trade deal that would have covered 40% of the world’s GDP. This deal has continued as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, but without the giant US economy, it is rather like the EU without Germany. The horrible truth is there are not that many New Zealanders that Vietnam can sell cheap manufactured goods to. The fact that Bernie Sanders and Trump had both attacked this deal early in 2016 showed the protectionist turn US politics was taking.

The true nature of this shift is reflected in the Biden administration ruling out any new trade deals, maintaining the Trump tariffs on China and continuing the Trump era policy of blocking nominations to the appellate court of the World Trade Organisation (WTO). This obscure technical move has huge implications, as without a functioning appellate court the WTO cannot enforce any rulings. For example, the WTO ruled against American tariffs on steel and aluminium imports from China in December 2022. But the USA can appeal the ruling to the appellate court and as this court can’t sit due to American actions, the WTO can’t authorise other countries to respond to the American tariffs. This is true of any other country who now wishes to impose trade limitations. The WTO’s role as a trade referee has just collapsed.

The Chinese have set a path for world trade that others are now following. They saw trade as a means to an end, nothing else. They used the world’s openness — notably their accession to the WTO in 2000 — to become an export powerhouse, growing their economy at a breakneck pace. This went hand in hand with exploiting the greed of Western multinationals, desperate to access the growing Chinese market. China would let certain Western firms in, on their terms, extracting their technology expertise in the process. The firms they let in, such as Apple, contributed directly to China by building the iPhones they sold to Chinese consumers in China, paying Chinese workers. The Chinese were too sensible to ever let American social media into their market. The various half-cocked attempts by Western governments to limit or ban Tik Tok shows that they are following the Chinese approach and that imitation is the sincerest form of flattery.

The truth is that China and the USA both have such vast home markets that the global trading system is an optional extra that can be sacrificed in their battle to be the dominant global power of the 21st century. Every other major economy or trading bloc, even the EU, will be helpless bystanders, caught in the trade war crossfire, forced to take protectionist measures to protect their economies and firms. This is not surprising to anyone familiar with history. Those Brexiteers who wished to return to the nineteenth century liberal free trade should have remembered that Britain ultimately sacrificed free trade and even the Empire to stop German hegemony in Europe. History goes in cycles and the current period of global free trade is rapidly coming to an end.