An analysis into the impediments and solutions to free trade

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International trade has increased significantly in the 55 years after World War II. Merchandise exports alone grew from a relatively low amount of $124.5 billion in 1960 to $16,576 trillion in 2015. This trend was facilitated by a rise in the prominence of international institutions and cooperation amongst states operating within an anarchic world. Such is the importance of international trade that 164 countries are currently signatories of the World Trade Organization (WTO). That is, in an effort towards maximizing the benefits from trade by improving mechanisms and cooperation amongst states in an effort to avert protectionist policies and unfair trade practices. Given the apparent benefits of trade, the author will analyze and contrast the various economic and political arguments for and against free trade. Elucidating on the impediments to trade before suggesting the main thesis of this article will do this. That is, to elaborate on and discuss the various means available to the proponents of free trade. This is important in order to ensure that the world does reject the benefits from cheap goods, specialization and knowledge spillovers in the wake of rising populism and anti-trade rhetoric.

 

1) Economic theory and the benefits of international trade

The theories and ideologies promoted and widely accepted by economists regarding free trade revolve around Adam Smith’s absolute and David Ricardo’s comparative advantage theories. A useful starting point in understanding these theories is to assume a world in which a country produces two goods with 2 labour as the only input. The aforementioned economic theories further use the concept of opportunity cost to prove that specialization and trade increase a countries production possibilities frontier. Put another way, trade assists in increasing the optimal level of output that a country can both consume and produce. Furthermore, theory suggests that trade allows individuals within an economy to consume at a point above what would have been possible in autarky. The transition mechanism for attaining the benefits of trade is only possible after identifying absolute and comparative advantages, specializing in the production of these goods, and then trading with another country for the good that they don’t produce without any trade barriers. This conclusion does not change when the economic model goes one-step further in order to account for differences in countries’ factor endowments of land, labor and capital as outlined in the Hecksher-Ohlin model. That is, economists prove that countries will still benefit from trade in spite of increasing opportunity costs and differences in underlying economic resources and tastes.

These economic arguments suggest that countries engaging in trade will be better off than those that don’t and that free trade policies are better than countries facing isolation, trade embargos and protectionist policies. An example of this would be to contrast the isolated, communist regime in North Korea, which faces significant economic woes and a lower standard of living level relative to their “globalized” neighbours South Korea. That said the Hecksher-Ohlin model includes a useful insight that states that the shares of the gains will not be evenly distributed. That is, trade implies that there are winners and losers. Therefore, it would be remiss if the domestic implications of trade and the politics surrounding trade policy are not discussed and understood.

 

2) Domestic politics and its influence on trade policy

The Stopler-Samuelson theory is an expansion of the Hecksher-Ohlin theory and states that a country will export the good that pertains to its abundant factor relative to the rest of the world. Furthermore, a country will import the goods where it is not well endowed relative to the rest of the world. This statement along with an explanation of the prediction of the Hecksher-Ohlin model highlights a pertinent point. Notwithstanding, the country as a whole benefits from trade however, the benefits are not distributed equally across the country. That is, the owners of the factors of production that is abundant will gain from free trade whilst the owners of the factors of production that isn’t abundant will lose out. The implications of this are a fragmentation of trade policy through class cleavages. That is, the losers will generally try and lobby government to increase tariffs, deter trade and protect their incomes while the winners will lobby for free trade and liberalization. Understanding the different class cleavages and their influence on domestic politics assists us in explaining why the US for example, still protects industries such as its agriculture and steel sectors from competition in China and Africa. Moreover, it gives credence to the recent rise in populism.

Looking at a country’s policy through a different lens, Ehrlich (2007) elaborated on the effect of institutions on trade policy making. That is, the level of access points for lobbying groups significantly decreases the cost of class cleavages promoting protectionism. This theory is further accepted when looking at various variables such as the number of parties represented in government, electoral districts and party discipline. Synthesizing this would imply that it is a very difficult task for free trade advocates and governments to overcome protectionist movements across segments of an economy unless the president of a country, who acts independently of his/her local constituencies, enforces executive decisions taking into account national and international interests. A countries domestic policies and its impact on the international system is important and needs to be elaborated on.

 

3) International politics and its impact on international trade

There are various international relations theories that exist to understand trade and cooperation. This paper will focus on both realism and institutional liberalism and their understanding of the current trade regime. That is, realists argue that in an anarchic world, individual states seek to maximize and protect their security and power. Therefore, a realist would stress that cooperation is a zero sum game that can only be maintained through hegemonic power. Seen through this lens, a realist would further argue that cooperation and trade after WWII was underpinned by the United States’ (US) inordinate economic and military strength. That is, the US managed to solicit cooperation regarding trade policy in order to ensure that it exclusively accrues the benefits of the new international system that it was creating. Extending this view further, realism and hegemonic stability theory highlighted by Krasner (1976) would suggest that international cooperation would cease to exist once the US loses its position as an undisputed hegemon. That is the world needs an undisputed hegemon to incur the high costs of insuring compliance, provide public goods and resources in order for it capture the benefits of free trade. Synthesizing this argument and applying it to current affairs would predict that the rise of China as an economic hegemon and the prospect of a multipolar world would inevitably lead to widespread protectionism and subsequently end of the prospects of free trade.

The author would argue that the realist view is negative and rather insufficient in predicting future cooperation in the current international system and the prospects for free trade going forward. Put another way, realism and the hegemonic stability theory fails to incorporate the role of non-state institutions, such as the World Trade Organization, and the influence of domestic politics on free trade agreements and cooperation. Moreover, it would be very remiss to understand economic theories predictions on the gains from free trade and increased cooperation as a zero sum endeavor. Rather, free trade benefits all countries and societies that engage in it. Finally, it is worth mentioning that Krasner’s (1976) hegemonic stability theory could only account for 50% of the scenarios experiences chosen within his paper. This implies that cooperation and free trade is still possible.

Given the fragility of the hegemonic stability theorem as well as an apparent flaw in seeing trade as zero-sum cooperation, it would be prudent to discuss international institutions. That is, in an anarchic world, the Coase theorem provides us with a framework to understand how these institutions assist in the creation of conditions necessary for cooperation. The Coase theorem states that cooperation and pareto-optimal outcomes are possible when there is a robust legal framework to work by, zero transaction costs and unbiased symmetrical information is available.  Taking this a step further, facts vindicating the importance of the WTO include the point that protectionist policies and tariffs have decreased significantly. Moreover, the WTO has 164 signatories today, which emphasizes worldwide support and significance. Finally, arguments surrounding China’s threat to the current world order are misguided. That is, they have benefitted significantly from globalization and will see their best interest served within the current system. That said, as outlined by the recent election of Donald Trump and the rise of anti-trade rhetoric, more needs to be done in order to ensure the benefits of free trade are realized and distributed.

 

4) What can be done in order to ensure a free trade system?

The complicated nature of international politics revolving around cooperation implies that there is no panacea for free trade activists. Notwithstanding some solutions and policy suggestions have been proposed by various economists. More specifically, policymakers understand that educated individuals are more likely to understand and support the free trade argument. Therefore improved education in understanding free trade and various retraining systems can assist in ensuring that those displaced by trade, can adjust to different industries. Secondly, a free trade system is not possible without a robust judiciary system and supporting institutions. That is, these institutions ensure that competition environmental and human rights laws are upheld and maintained. These institutions need to be promoted, improved upon and sustained within WTO signatories. Thirdly, in order to ensure that the benefits of trade are evenly distributed, governments need ensure an increasingly progressive tax system. That is, to taxes the winners and large incomes accrued from trade and redistribute these benefits to the losers either via social grants or increased minimum wages. Finally, in order to strengthen the WTO effectiveness, it needs to overcome loopholes in anti-dumping law, the enforcement of intellectual property rights, quotas and developing economies’ limited access to developed markets. It is imperative that the institution deals with these criticisms effectively and transparently in order to ensure that it creates the conditions necessary for enhanced cooperation in order to ensure that we move towards a world of freer trade.

In conclusion the author argued that economic theory largely supports free trade. That said, it also allows us to acknowledge that there are winners and losers from trade. Therefore, the advocates of an international free trade system need to acknowledge the intricacies and effect of domestic policies and international institutions in a world of anarchy and omnipresent income inequality. The international system has come a long way; however, it would be foolish to expect an instantaneous shift towards free trade without significant investment in solutions to address the current challenges mentioned. That said the author argued that one should view international cooperation with regards to trade through liberalist institutionalist lens. This will ensure that there is enhanced positive sum cooperation amongst key stakeholders both domestically and internationally. Proponents of free trade should all be working together towards promoting a system that economists rightly predict will make the world a much more prosperous one.

About the Author

Carlos Baeta
Proudly South African. Masters student at Fordham University in New York. Entrepreneur, young leader, coffee addict and an avid Liverpool fan. Let's change the world.

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