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Friday, January 27, 2017

Free Trade Doesn’t Depend On Multilateralism

Multilateral agreements are not the only method to open markets.

For the first time since the end of the Second World War, multilateral institutions are losing their influence regarding open trade.

The World Trade Organization (WTO) has gone into hibernation after the failure of the Doha Round, and the European Union (EU) long regarded as a pro-trade force is facing its own local protectionist pressures. The EU’s difficulties in ratifying the Comprehensive Economic and Trade Agreement (CETA) with Canada, and even Brussels’ recent attempt to restrict the free movement of labor to satisfy Western Europe’s protectionist claims against Eastern Europe, show how the EU trade agenda is challenged.

Exports are seen as the only key to prosperity. This is simply wrong.

Moreover, in the United-States, the election of Donald Trump marks the beginning of a new protectionist era. Trump considers both the Trans-Pacific Partnership (TPP) and The Transatlantic Trade and Investment Partnership (TTIP) as contrary to America’s interests. He asked for a renegotiation of NAFTA and even mentioned the possibility of withdrawing from the WTO.

The recent nomination of Peter Navarro, an economist well-known for his hostility against China’s growing commercial influence, as head of the newly created National Trade Council confirms the will of the new administration to engage in a new “trade war” reflecting the old mercantilist bias that views international trade as a zero-sum game.

Good News

If these countries had waited for a global consensus before opening their markets, they would have lost decades of economic development.

Fortunately, there is still a way to promote free trade despite the fact that Europe and America are likely to retreat from the global trade liberalization agenda. Multilateralism is indeed not the only method to open markets. Actually, one can say multilateral approaches have long been motivated by mercantilist instincts: trade agreements are based on the belief that opening markets is only viable on a strictly reciprocal basis. Imports are seen as a trade-off and exports are considered to be the only key to prosperity. This is simply wrong.

The benefits of international trade can be precisely evaluated by the value of imports that can be bought with a unit of exports. In other words, international trade is always a positive-sum game. That is why free trade can be promoted without any treaty.

A country that unilaterally opens its markets benefits from its comparative advantage independent from other governments’ remaining trade restrictions. An open economy allows its citizens to purchase cheaper quality products and favors a better division of labor and specialization. Everyone becomes more productive, and wealth production increases while poverty declines.

Would It Work?

Unilateral free trade is not just a theory. The repeal of the British Corn Laws in 1846 is a leading example of the success of a major initiative towards autonomous liberalization. To take more contemporary cases, Hong Kong and Singapore are also known to have unilaterally settled two of the most liberal trade regimes in the world. New Zealand adopted similar agricultural policies in the late 80s, well before the agreement on agriculture concluded under the WTO in 1994, which still has not ended European and American agricultural protectionist policies.

If these countries had waited for a global consensus before opening their markets, they would have lost several years or decades of economic development.

It would be easier to spread a pro-trade culture by iteration and emulation rather than relying on multilateral institutions.

It would be obviously naïve to think these initiatives could be taken by Europe or America in the short term given their respective political situations. But the world’s march towards open trade does not have to be slowed down by these countries. This is true for other OECD countries, emerging countries and even developing countries.

A 2005 World Bank report reminds us “of the 21 percentage point cuts in average weighted tariffs of all developing countries between 1983 and 2003, unilateral reforms account for roughly two-thirds of the reduction.” This reduction shows that the importance of multilateralism has been overrated.

Nowadays, tariffs are not the main issue, though. World trade now has to face the increasing proliferation of non-tariff barriers. Rather than waiting for the unanimity of world leaders, governments wishing to save precious time and work on the economic development of their countries should set an example by recognizing foreign regulatory regimes and unleash the benefits of international competition.

The decline of multilateralism in favor of local liberalizations does not necessarily jeopardize the hope of setting a global, trade-friendly order. It would be easier to spread a pro-trade culture by iteration and emulation rather than relying on multilateral institutions. After all, given the political context and the impossibility to get a world consensus, these institutions would do nothing more than leave remaining global trade in deadlock.

This article is adapted from an earlier French-language version.