Trade does not require a group of free-market capitalists

In recent years, both America and the world have seen a marked shift in trade policy, away from a longstanding commitment to economic interdependence and toward fragmentation. In turbulent times, the political impulse to put one's own country first is understandable, but the problem is that an “every man for himself” mentality tends to leave most of them poorer in the end.

To avert the damaging effects of fragmentation and costly protectionism, we do not need to turn everyone into free-market capitalists. We just need a renewed commitment to some acceptable core principles and the pursuit of strategic plurilateral agreements with other economies when broad-based multilateral efforts fail.

Global trend towards tariffs and fragmentation

The US is one of the driving forces behind the move away from freer trade, but it is not alone. The phenomenon is part of a global trend in which advanced economies are increasingly using tariffs, preferential treatment and trade restrictions to protect their national security and domestic priorities. Common targets of these measures are China and Russia.

Barbara Matthews, research fellow at the Atlantic Council, and I explain in a recent article that the global landscape is more fragmented and policymakers are faced with the task of recalibrating their trade policies to minimize the negative impacts.

The importance of basic trading principles

One way out of this mess could be to return to the core principles of the Bretton Woods system. The current trading system began in July 1944, when delegates from 44 Allied nations of World War II met in Bretton Woods, New Hampshire. Few of the participants could be considered serious advocates of the free market or free trade.

The story shows an eclectic group of battle-hardened allies from around the world and with different ideological perspectives. They were pragmatists and designed a practical framework for cross-border economic relations that would, at best, stimulate economic growth and, at least, prevent another costly conflict.

The two basic principles that should guide trade policy are national treatment and most-favored-nation status. National treatment ensures that countries treat imported goods no differently than domestically produced goods, while most-favored-nation status guarantees that each country grants the same trade benefits to all nations.

Realistically, domestic priorities will always play a role in shaping trade policy. The challenge is to pursue domestic priorities in a way that least restricts trade. By simply finding a way to adhere to the principles of national treatment and most-favored-nation treatment, countries can avoid the economic costs associated with growing protectionist tendencies. Most countries can thus maintain a high degree of economic interdependence, which has historically been an engine of growth and stability, particularly for the United States.

Plurilateral agreements: a way forward

If WTO members cannot reach unanimous agreement, or if authoritarian, non-market economies render the current trading system unworkable, plurilateral agreements can be a means of progress. These deals, involving a limited number of willing countries, can address specific policy priorities while avoiding the gridlock that often accompanies broad, multilateral negotiations. For example, the United States could seek plurilateral agreements focused on trade in renewable energy or ending harmful fisheries subsidies (as I have written about here and here).

Other countries are leading the way. Wendy Cutler and Jane Mellsop explain a new agreement between New Zealand, Costa Rica, Switzerland and Iceland. The climate change, trade and sustainability agreement will reportedly remove tariffs on almost 300 environmental goods, encourage the introduction of eco-labels so consumers are better informed, eliminate most fossil fuel subsidies and liberalise trade in environmental services.

In the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), eleven member countries across the Pacific have committed, among other things, to limiting certain types of subsidies, particularly those that distort trade and investment. It also requires member countries to be transparent about the subsidies they provide, particularly to state-owned enterprises.

Diploma

An economically viable trading system does not require everyone to be free-market capitalists. But an “every man for himself” mentality will ultimately leave everyone worse off.

The United States and its allies should reaffirm the core principles of the Bretton Woods system and enter into strategic plurilateral agreements with their economies. In doing so, countries can address global trade challenges in practical ways, avoid costly conflicts, and, with luck, make positive progress for the future.