/

What in the world happened to free trade?

by Michael Sutton

Special To The Japan Times

These days nobody talks about free trade. It is widely believed that free trade is a relic of the past. Free trade, like the term globalization seems to be out of place in this world of polite environmentalism. Free trade has been replaced by the sensitive and caring “fair trade.” In reality, the bedfellow of fair trade is national self-sufficiency, with the specter of protectionism lurking in the background.

Outside the classroom textbook, the pure version of free trade has never existed. The removal of every impediment to the flow of goods and services has been thwarted by the tyranny of distance and the prolific practice of national protectionism. The rigorous education of the economist from the end of the nineteenth century onward has been accompanied by the equally rigorous effort by governments, individuals and industries to invent promote and secure increasingly imaginative protective measures, devices and regulations. Many of these practices have grown up pragmatically as part of national economic progress or influenced by now defunct economic theories or changing societal expectations.

Upon or perhaps before graduation, most free trade economists recognize the vast difference between theoretical instruction and real world trade policy. Fortunately governments also recognize in real world trade policy another equally critical principle: International interaction cannot coexist with strict economic unilateralism. For the international system to work there must be a mutual “give and take.” Economists working from the ideal and governments working from the real eventually reach a middle ground. This middle ground is where governments meet to negotiate what is acceptable and unacceptable in international trade. The current arrangement is the World Trade Organization (WTO) which was established in 1995.

Governments also accept the principle that every nation in the age of free trade must enjoy certain privileges. Every nation has particular products, sectors or rules and regulations which seem to permanently elude reform. The pursuit of open trade on the one hand and the acceptance of certain deviations from open trade is the widely accepted norm at the heart of multilateral trading system. Critics of free trade seek a world free of global trade rules, a scenario feared by governments and thus unlikely to occur.

Free trade in practice is the freeing up of trade barriers, the renegotiation of global regulations and rules and the adherence to international trade laws and conventions. Until the 1980s, a very limited notion of free trade was pursued in the General Agreement on Tariffs and Trade (GATT) which centered on reciprocal reductions of tariff barriers in industrial products. Tariffs, being taxes on imports, were easy to measure, compare and therefore negotiate. Large negotiations were rare, the most significant being the Kennedy Round (1964-1967) and the Tokyo Round (1973-1979). The GATT was by no means a perfect system. The dispute settlement procedures eventually broke down, governments discovered more innovative methods for protection, entire sectors of were excluded from negotiations, and developing countries were largely ignored.

The Uruguay Round (1986-94) changed everything. The inclusion of agriculture secured widespread participation but was the most controversial aspect of the negotiation. Despite the costs the WTO was established with a more comprehensive coverage of trade rules in previously ignored sectors such as agriculture, services, technical barriers to trade and subsidies. Publicly and politically, free trade in its last incarnation died in 1999 during the Seattle Ministerial of the WTO. Marred by riots outside and fractures within, failure to reach agreement on agriculture led to the WTO’s “lost decade.”

Despite this lost decade at the WTO, critics of free trade will seek in vain for a world of trade anarchy. China’s rise is driven by international trade, which occurs in a global trading system of rules, conventions, practices and policies. As the economic weight of China and India increases, their economic stake in this global system will only intensify. Just as the United States, the European Union and Japan before them, significant new players recognize that this mutual “give and take” is a necessary cost of leadership. At this time of uncertainty, a new trade round is needed to reflect new circumstances, attitudes and aspirations. The dream of free trade along the middle road of pragmatism is far from over.

Michael Sutton is a research fellow at the WTO Research Center, Aoyama Gakuin University, Tokyo.S