This is one of the most common questions I hear nowadays. But the distinction between free trade and protectionism is not especially helpful for understanding the global economy. Not only does it misrepresent recent history, it also misconstrues today’s policy transitions and the conditions needed for a healthy global economy.
‘Free trade’ conjures an image of governments stepping back to allow markets to determine economic outcomes on their own. But any market economy requires rules and regulations, which are typically promulgated and enforced by governments. Moreover, when national jurisdictions are linked up through international trade and finance, more questions arise: Which countries’ rules should take precedence when businesses compete in global markets?
In this light, it becomes clear that hyper-globalization—roughly from the early 1990s until the onset of covid—was not a period of free trade in the traditional sense. The trade agreements signed were not so much about removing cross-border restrictions as they were about regulatory standards, health and safety rules, investment, banking and finance, intellectual property (IP), labour, and many other issues previously in the domain of domestic policy.
Nor were these rules neutral. They tended to prioritize the interests of politically connected big businesses over all else. These businesses not only got better access to markets globally, they were also the primary beneficiaries of special international arbitration procedures to reverse government regulations that reduced their profits.
Similarly, tighter IP rules—which allow pharmaceutical and tech companies to abuse their monopoly positions—were smuggled in under the guise of freer trade. Governments were pushed to free up capital flows, while labour remained trapped behind borders. Climate change and public health were neglected, partly because the hyper-globalization agenda crowded them out, but also because the creation of public goods would’ve undercut business interests.
In recent years, we have witnessed a backlash against these policies. What some decry as protectionism and mercantilism is really a rebalancing towards addressing important national issues such as labour displacement, left-behind regions, the climate transition, and public health. This process is necessary both to heal the social and environmental damage done under hyper-globalization, and to establish a healthier form of globalization for the future.
US President Joe Biden’s industrial policies, green subsidies and made-in-America provisions are the clearest examples of this reorientation. True, these policies are a source of irritation in Europe, Asia and the developing world, where they are seen as antithetical to established free trade rules. But they are also models for those seeking alternatives to hyper-globalization and neoliberalism.
During the post-1945 Bretton Woods regime, which prevailed through the early 1980s, governments retained significant autonomy over industrial and financial policies, with many prioritizing the health of their domestic economies over global integration. Trade pacts were weak, placing few constraints on advanced economies, but even fewer on developing countries. Domestic control over short-term capital flows was the norm rather than exception.
Despite this more closed global economy, the Bretton Woods era proved conducive to significant economic and social progress. Advanced economies experienced decades of rapid growth and relative socioeconomic equality until the second half of the 1970s. Among low-income countries, those that adopted effective development strategies grew by leaps, even though their exports faced much higher barriers than do developing countries today. When China joined the world economy with great success after the 1980s, it did so on its own terms, maintaining subsidies, state ownership, currency management, capital controls and other policies more reminiscent of Bretton Woods than of hyper-globalization.
The legacy of the Bretton Woods regime should give pause to those who believe that permitting countries greater leeway to pursue their own policies is necessarily detrimental to the global economy. Ensuring one’s domestic economic health is the most important thing a country can do for others.
The Bretton Woods regime operated in the context of the Cold War, when the West’s economic relations with the Soviet Union were minimal and the Soviet bloc had only a small foot-hold in the global economy. As a result, geopolitical competition did not derail trade and investment.
The situation today is entirely different. America’s main rival now is China, which occupies a very large position in the world economy. A true decoupling between the West and China would have major repercussions. One therefore can find plenty of good reasons to worry about the future health of the world economy.
But if the global economy does become inhospitable, it will be because of American and Chinese mismanagement of their geopolitical competition, not because of any supposed betrayal of ‘free trade.’ ©2023/project syndicate