To answer the question, “Whither free trade?” it is necessary first to answer the prior question: “Whatever happened to free trade?”
Whatever happened to free trade?
It died between World War I and World War II. It flickered to life again after World War II only to be snuffed out, smothered by a monstrous web of governmental rules, regulations and restrictions that shackle markets and impede the free exchange of goods and services – both domestically within sovereign nations and internationally among them.
The rebirth of free trade was extinguished with the introduction of government-managed trade, the history of which is charted by the litany of alphabet efforts of politicians and bureaucrats to substitute their own rules for the working of free markets – NAFTA, CAFTA, WTO and the TPP, to name a few. Bizarrely, all of these acts of destruction were committed in the name of open markets and free trade.
Prior to World War II, it is safe to say, beggar-thy-neighbor, protectionist practices significantly hobbled the free exchange of goods in world trade. Most notoriously, the Smoot-Hawley Act in the United States led to contagion effects throughout the world and, ultimately, a world-wide depression. In 1976, economist Allan Meltzer noted that the decline in U.S. food exports and falling agricultural prices contributed significantly to bank failures in 1930 and 1931, triggering subsequent bank failures and eventually monetary collapse.
In the aftermath of WWII, international bureaucracies, such as the General Agreement on Tariffs and Trade (GATT), were established to set rules that would lower trade barriers by restricting protectionist trade policies and decreasing discriminatory tariffs. While the GATT regime clearly produced an improvement in the world trade environment, it nevertheless laid the predicate for what was to follow with managed trade. From GATT forward, there was a concerted effort by managed-trade bureaucrats to pass themselves off as committed “free traders.”
By 1997, Fordham University and Manhattan College adjunct professor Robert Batemarco was able to connect the dots between the burgeoning welfare state, creeping government control of domestic economies and international restraints on trade and exchange:
“…government restrictions on international trade are of a piece with domestic restrictions on competition. They share the same goal: To redistribute income from the many to government’s chosen few and to substitute its own preferred allocation of resources for that of the market. Indeed, by restricting trade with foreigners, governments close off an important means of mitigating the impact of their domestic restrictions. This is what John T. Flynn had in mind when he said, ‘The first condition of a planned economy is that it be a closed economy.’”
At the heart of government planning and economic engineering, both domestic and internationally, is what public choice economists call rent seeking: Schemes conjured up by interested parties petitioning governments to protect themselves against competition and pursuing an advantage for themselves against all would be competitors; and, efforts by bureaucrats and politicians to build bureaucratic empires and increase their power at the expense of economic growth and prosperity – evidenced, for example, by anti-dumping rules, labor laws and harmonization, right down to and including harmonization of nations’ tax and monetary policy.
As this neo-Mercantilism takes its toll, especially on the poorest individuals and nations striving to better themselves, and economic engineering goes array, as it always does, the usual reaction sets in. Politicians and bureaucrats double down on their misguided policies in an effort to use government to mitigate the damage their meddling created in the first place: More planning, more economic engineering, more grasping for power, more rules and regulations, more efforts to stunt competition, more preferential treatment and greater centralization and uniformity – again, all sold as ersatz “free-market solutions,” to create jobs and stimulate economic growth. In fact, these policies do not foster trade and commerce; they encumber them.
When the failure of government-managed trade becomes so obvious it cannot be ignored, desperation sets in. One desperate solution has been so-called “free trade zones,” which turns out to be little more than a kind of second-order managed trade solution for economic basket cases created by governments’ first-order attempts to manage economies and trade. As early as 1995, Columbia University professor Jagdish Bhagwati explained the Orwellian manner in which this version of second-order managed trade was being sold with the trappings of “free trade” while simultaneously, and contradictorily, being touted as the solution to the shortcomings of free trade: “…it is time that we realized that the phrase Free Trade Areas [FTAs] is Orwellian newspeak. It lulls us, indeed editorialists and columnists and politicians, into focusing only on the fact that trade barriers are lowered for members to the exclusion of the fact that, implicitly, the barriers are raised (relatively) for nonmembers.
FTAs are therefore two-faced: they embody both free trade and protection. The reason is that they are inherently preferential and discriminatory. Perhaps, as economists interested in the quality of public policy discourse, we should take a pledge to rename the FTAs henceforth as PTAs (i.e. preferential trade areas).”
More preferable still would be a pledge by politicians and professors alike to rename “free trade agreements” henceforth as “managed trade agreements,” the very antithesis of authentic free trade.
Thus, most of the bad that free trade gets blamed for – job loss, declining wages, hollowing out of domestic manufacturing, out-sourcing, offshoring and the like – ultimately can be laid at the doorstop of government-managed trade and domestic economic engineering, i.e., mercantilism. History demonstrates unambiguously that mercantilism leads to favoritism, inefficiency, reduced prosperity and tyrannical government.
There is tragic irony in the invasive, creeping-and-climbing, Kudzu-like growth of over-grasping, gargantuan governments strangling all in their path. What a tragic turn of events this is, in light of the fact that the rampant spread of overweening bureaucratic states, posing as democracies, emerged at the fall of communism and the end of the Cold War – a point in history at which humanity was presented with the opportunity to achieve liberty, peace and prosperity through the time-tested means of free markets and free trade.
The discovery of the virtues of free trade go back to the late 18th and early 19th centuries in the writings of Adam Smith, David Ricardo and James Mill, father of John Stuart Mill. The case for free trade broadly defined holds that people should be free to trade freely among themselves for goods and services without government intervention and restrictions, both among their own countrymen and with people in foreign nations. Under this arrangement, people will tend to produce and export those goods in which they excel and to import those goods in which they and their fellow countrymen do not excel. This was termed the Law of Comparative Advantage by Ricardo.
Since Ricardo first postulated the Law of Comparative Advantage two centuries ago, free trade practices consistently have demonstrated their ability to allocate resources most efficiently, i.e., to put the factors of production to their most productive use, increase productivity and, thereby, raise standards of living by maximizing economic growth. And yet, the politicians and bureaucrats in charge around the world have ignored this track record of success in favor of wooly-headed Keynesian economic theories based on a collectivist ideology and unconfirmed assumptions of market failure and instability that require constant government management of trade and commerce.
Today, we are seeing the accelerated advance of a global version of what Alexis de Tocqueville some 175 years ago dubbed a “sole tutelary,” a central political authority in which: “Power is absolute, minute, regular, provident and mild…the sole agent and the only arbiter of [citizens’] happiness…[and] after having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a network of small, complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd.”
This hydra-headed, bureaucratic Leviathan now extends its reach globally, beyond sovereign boundaries, in part through unelected international agencies, such as the World Trade Organization and misnamed “free-trade” agreements.
Whither free trade?
And so, we return to the original question.
The prevailing and continuing trend toward increasing government control of every facet of life, including trading with people in foreign nations as one sees fit, appears irreversible by any normal democratic political means. Short of an economic crackup, there appears to be no practical, incremental means by which to reverse the status quo, which, to quote former President Ronald Reagan, “is Latin for the mess we’re in.”
But, my opinion is just that: my personal judgment. I could be wrong. Therefore, it may serve some useful purpose to lay out systematically what authentic free trade would consist of and how it could work in a world recovering from the almost certain catastrophe that awaits us along the course the world is traveling. Perhaps at this point, the necessity for rapid economic growth would overcome inertia and compel people to accept the obvious: Free markets and free trade work; government intervention and planning do not.
Here is a partial outline of proposed free trade policy and related tax policy necessary to make free trade viable. It is incomplete as it omits other economic reforms necessary to remove other government interference into the domestic marketplace to make it possible for domestic manufacturers to compete with the manufacturers of other countries. Neither does the outline address currency and monetary policy, all of which are topics for another day.
- Pull out of all existing trade deals and trade organizations such as the WTO and NAFTA.
- Repeal the income tax (both personal and corporate) and replace it with a comprehensive and neutral national retail sales tax along with a uniform and non-discriminatory, border-adjusted, destination-based cash flow tax on businesses.
- Enact a law providing for the government to enter into binding bilateral free trade agreements with its trade partners providing that both partners submit trade disputes between the two nations to an arbitration board agreed upon in advance by both partners. If a trade partner refuses to abide by an adverse ruling of the arbitration board, the alternative schedule of tariffs discussed in #5 below automatically would be triggered.
- All bilateral trade agreements would be of the same standard form specified in law, stipulating that both parties would refrain from erecting tax and non-tax barriers to trade and committing not to engage in any form of discriminatory and unfair trade practices. The language should be general and “constitutional” in nature and not subject to negotiation between the parties prior to signing.
- Establish an alternative, non-discriminatory and neutral schedule of tariffs to be levied on the imports of countries not a party to a bilateral agreement and to be triggered against a bilateral trade partner’s imports if and only if there is an adverse ruling from the trade arbitration board that cannot be resolved between the two countries.
This outline falls short of the simplicity and elegance of the original American Free Trade Agreement among the original 13 American states, i.e., the U.S. Constitution, whereby the Framers mandated free trade among all the states in the union. The arrangement is spelled out in Article I, Section 9, of the Constitution: “No tax or duty shall be laid on articles exported from any state. No preference shall be given by any regulation of commerce or revenue to the ports of one State over those of another: nor shall vessels bound to, or from, one State, be obliged to enter, clear, or pay duties in another.”
There is a reason for the added complexity of the outline suggested above: The American states are bound together in a constitutional system and subject to federal law and the authority of federal courts for any breaches of the Constitution; U.S. trading partners are not.
So, the question arises: How are disputes between bilateral trading partners not covered by some larger constitutional document to be resolved? This quandary, in fact, has been the overriding impetus behind the burgeoning rules and bureaucracies in multilateral trade organizations such as the WTO. The solution to compliance and dispute resolution among trading partners within these multilateral trading organizations usually is for members of the organization to cede a part of their national sovereignty to the bureaucratic organization. Little wonder, a growing number of people rightly perceive these international organizations as the vanguard of global government.
Much is left undone by the foregoing outline, in two areas in particular. First, no lasting prosperity can be hoped for until monetary reform is undertaken and sound money restored. This may be taken care of the hard way in the natural course of events as the world economy cracks under current interventionist policies, and people come to realize the necessity of sound money.
Second, to expand on Robert Batemarco’s observation above, the trend toward collectivization in virtually every nation around the world is a strong impetus toward global centralization and global government, as the WTO illustrates. It is, therefore, absolutely necessary to reverse the trend toward collectivization.
As I point out in Taxed to Death; How the Income Tax & IRS Harm Everyone in America, the process of collectivization the United States was: A counter-revolution against the precepts of the original American Revolution; a counter-revolution that came to be characterized by everything the Founding Fathers feared most and had attempted to guard against: unbridled, majoritarian democracy, central planning, unrestricted direct taxation, unconstrained government spending and unrestrained borrowing, a debauched currency printed without restraint and disconnected from any real backing, unbounded government meddling and intervention into every facet of daily life and commerce, vast social engineering and empire building.
It is bad enough that free trade continues to give way to globally managed trade by quasi-government bureaucracies. It is even more concerning to see another dangerous trend developing. Increasingly, nations are imposing trade sanctions to achieve foreign policy objectives, especially by large, powerful nations such as the United States. Tit-for-tat, retaliatory trade wars are bad enough; once trade becomes weaponized in a delirious attempt to impose the empire’s desires on the rest of the world, trade wars can easily turn into shooting wars. We are well advised, therefore, to remain mindful of the old dictum that “when goods don’t cross borders, soldiers will.”
Lawrence Hunter is a senior fellow at the Institute for Global Economic Growth