The End of Free Trade?

July 31, 2008; Page A14
The demise of the Doha trade round is another blow to the struggling world economy, and there's plenty of blame to go around. But the crucial question going forward is whether this is merely a temporary setback, or if it marks the end of the post-World War II free-trade era that has done so much to spread prosperity.

We tend by nature and history toward optimism, but no one should sugar-coat Doha's collapse. For the first time since the multilateral trading rounds began after World War II, a trade expansion effort has ended in failure. Trade negotiations are never perfect, but for half a century the trend has been toward freer trade and more open markets. This has opened vast new opportunities for global business, spreading competition and innovation that have helped to raise living standards across the globe.

In 1990, trade represented about 40% of world GDP, according to the World Bank. By 2004, trade exceeded 55% of world GDP, and the global economy had expanded by 50%. The five fastest-growing countries from 1990 to 2004 were Albania, Bosnia and Herzegovina, China, Ireland and Vietnam, and all of them had annual double-digit increases in trade. Meanwhile, the countries that traded the least -- Iran, many African countries -- have stagnated.

So pervasive have the blessings of trade become that they are taken for granted. Americans hear a lot about textile plant closings in North Carolina, but they barely notice their expanded purchasing power thanks to Wal-Mart's vast global supply network. Thirty years ago something as simple as cotton shirts and trousers were expensive; now they're cheap. Fresh fruit was once rare in January; now it's ubiquitous.

Manufacturing exports supported nearly six million U.S. jobs in 2006, a figure that has surely grown given the recent boom in U.S. sales abroad. Farm exports supported some 806,000 American jobs in 2005, a figure that has also surely grown with the booming world demand for U.S. corn, soybeans, wheat, meat and specialty crops.

Yet at Doha, all of this wasn't enough to defeat the protectionists. The media spin of the moment is that this shows the rising power of the developing world. But the real dividing line in the world economy isn't this updated version of the North vs. South 1950s cliché. The real battle is between those who want to expand this era of global trade and prosperity, and those who want to carve out their own protected niches.

The latter seems to include Indian Commerce Minister Kamal Nath, who is the main villain in this week's failure. He preened as a Third World hero by refusing to open his country further to farm imports, insisting on a "special safeguard mechanism" that would have let countries jack up their tariffs if imports rose too rapidly. He claimed this would protect the "livelihood of millions of farmers" in India. But the rise of India's middle class has coincided precisely with the move of millions from the countryside to cities, as well as India's growing engagement with the world economy. More Indians will stay poorer longer because of his obstinance.

The U.S. political class also bears a substantial part of the blame. In its waning months, the Bush Administration has less power to persuade. But part of that weakness goes back to the original trade sins of its first two years. With its steel tariffs and overstuffed farm subsidy bill of 2002, the Administration sent a signal that domestic politics took precedence over U.S. global trade leadership. Its credibility never recovered.

Democrats in Congress have also spooked the world with their blatant protectionism -- from their recent veto override of a farm bill jammed with trade-distorting subsidies, to their refusal to ratify bilateral trade deals even with such vital U.S. allies as Colombia and South Korea. Barack Obama's promise to repudiate Nafta if Mexico and Canada won't go along with his ideas was also a trade shock heard 'round the world. For all their talk about listening to America's partners, Democrats are the world's biggest trade bullies.

Having defeated Doha, the world's protectionists will now press forward with their special-interest agendas, hoping to build a lattice-work of cartels and managed trade. One way to push back is with bilateral or regional trade pacts, but these also risk establishing regional cartels and a web of conflicting trade rules that raise business costs.

Doha's failure is a lost opportunity, but it could become much worse if it galvanizes even part of the world to resort to the tariffs and currency devaluations that led to and exacerbated the Great Depression. It was precisely the bitter memory of that era that led the world's postwar statesmen to build the GATT, the European Common Market, and the rest of free-trade system we now take for granted at our peril.

What the world really needs now is a fresh burst of global economic leadership -- on currency movements, pro-growth tax policies, and free trade.