The big question for trade in 2022

January 11, 2022

The idealized world of free trade

The establishment of the modern trade system was predicated on the belief that we could reasonably aspire to some approximation of the idealized world of free trade that has been sketched out in economic textbooks since the days of David Ricardo. According to this vision, reducing barriers to trade and facilitating cross-border commerce would bring higher quality goods, lower prices, increased levels of real wealth, and a higher standard of living. Of course, it was understood that the intensified competition brought by free trade would create “losers” as well as “winners”, but the overall gains from free trade would more than offset the losses.

The main imperative was to move towards free trade in a methodical and deliberate manner. The GATT, the WTO, and the myriad of regional and bilateral free trade agreements that began to proliferate in the 1990s were all intended to move us incrementally towards the goal of free trade.

Unfortunately, after a seven-decade pursuit of that ideal, there seems to be an increasing recognition that the real world of trade is simply not operating in the way we hoped. For starters, not all countries are playing the same game by the same set of rules. The two largest economies in the world, the US and China, operate under fundamentally different economic systems. As increased trade has led to deepening economic integration, the incompatibilities between these different systems have become more apparent. How can private US companies compete against state-supported Chinese companies which benefit from compliant banking and regulatory systems, captive domestic customers, a playing field tilted against foreign competitors, and generous (often opaque) subsidies? Unfortunately, neither David Ricardo nor the WTO have been of much help in resolving that question.

We have also learned that trade does not take place in an antiseptic vacuum. It is shaped and frequently distorted by a host of considerations that have nothing to do with trade, including geopolitical rivalries, domestic political imperatives, differing visions of appropriate environmental and labor standards, and clashing definitions of human rights. The economic textbooks made no provision for the intrusion of these unrelated yet profoundly impactful factors.

These messy real-world complications have corrupted the way in which the free trade model was expected to operate, resulting in diminished benefits and unanticipated – and often unwanted – outcomes.