What is the future of free trade?

In a three-part series, our correspondents report on a thorny political problem

Jun 27th 2018

In this three-part essay, our correspondents from around the world explore the debates about
free trade. We have written about what is happening in America and Mexico, Europe and Asia.

THE rise of Donald Trump has been a body-blow to all those who believe that free trade is a
good thing. Mr Trump wants to turn America protectionist. Not for many years has free trade
been such a hot political topic. But how is the political debate about free trade playing out in
other big economies?

NORTH AMERICA (JUNE 27TH)

United States

Free trade is popular and has benefited America. But politicians are increasingly mercantilist

THERE is something approaching a folk story surrounding American attitudes to trade. It goes
like this: in the 1990s, economists thought that free trade was good for everyone. America’s
markets were opened up, first to Mexico, through the North American Free Trade Agreement
(NAFTA), and then to China, through its permanent accession to the World Trade Organisation.
As a result, manufacturing jobs left the country. Then, in the 2010s, economists began to realise
that trade had damaged the lives of displaced workers and vulnerable communities, just as
politics took a protectionist turn through the rise of Donald Trump and Bernie Sanders.

That story misses several important points. First, economic theory always predicted that free
trade would harm some workers. Second, economists were not blind to the falling economic
prospects of unskilled American workers. Rather, they just attributed the rising inequality
between skilled and unskilled workers primarily to technological progress.

Third, this view—that technological progress, rather than global trade, has had the bigger impact
on workers—is still reasonable. It is true that economists have become more convinced of trade’s
concentrated costs for displaced manufacturing workers, roughly a third of whom experienced
unusually severe wage losses. But there have not been enough so-called “losers” to drive the
huge changes in the labour market that have taken place. Finally, the most recent trend is that
Americans have become more sympathetic to trade, not less.
Mexico

With the exception of Chile, Mexico has free-trade deals with more countries than any other state

IS ANTI-TRADE sentiment made in America? It certainly seemed so when Donald Trump’s

tirades against his country’s North American Free Trade Agreement with Canada and Mexico
shattered a seeming consensus in favour of free trade. NAFTA, Mr Trump says, is the “worst
trade deal ever made”, the fault of stupid politicians who gave away a fantastic deal to Mexicans,
who cannot believe their luck. Many Americans believe that the benefits of NAFTA have mostly
flowed southwards, to America’s cost; Mexicans tend to think the opposite. Citizens of both
countries share the view that renegotiating NAFTA would be a good thing.

Why are some Mexicans dissatisfied with NAFTA? The pact was sold to the Mexican public as a
deal that would bring the country’s standard of living closer to that of the United States. But the
salary gap between the countries has widened, not closed, since NAFTA arrived. Many of the
jobs NAFTA has created are in maquiladora factories along the border. That is good for Mexico’s
border states, but the benefits have not flowed through the rest of the economy. Compare
Chiapas, an impoverished southern state, and Aguascalientes, a state to the north where
investment has poured in. In the two decades after 1993, GDP per head doubled in
Aguascalientes but barely grew in Chiapas.

And yet when Mr Trump threatens to tear up NAFTA, most Mexicans fret about the economic
consequences. Mexico depends much more on trade with America than vice versa. In the
campaign for presidential elections, due on July 1st, candidates have spoken at length about
domestic issues like crime and corruption, but little about trade or Trumpism. Even Andrés
Manuel López Obrador, an old-school populist who is the overwhelming favourite to win, seems
unlikely to jeopardise the country’s trading relationship with the United States. Despite a history
of anti-trade positions, he says he wants to improve the deal, not scrap it.

The country has maintained its predisposition towards openness. Most Mexicans appreciate the
value of an open world where people, goods and ideas can travel freely across borders, whether it
is the upper class studying in American universities, the middle class seeking factory jobs or the
lower class receiving remittances from abroad. With the exception of Chile, Mexico has free-
trade deals with more countries than any other state. Previously closed sectors of the economy,
such as the oil industry, are now open to foreign investment. But Mr Trump’s antipathy towards
Mexico has exposed the pitfalls of relying too much on a single trading partner. Mexico ships
80% of all exports to the United States. It is now trying to diversify, looking to South America
to buy its beef and soyabeans, successfully expanding its trade pact with the European Union and
looking to join the Trans-Pacific Partnership with ten other countries. How fruitful these moves
are remains to be seen. Agustín Carstens, until recently the head of the central bank, says that
Mexican businesses have long succumbed to the “magnetic force that the US [economy]
exercises on us”.

The notion of a country trying to look beyond its main trading partner and closest neighbour may
sound familiar to readers in Britain. A staff member at the British embassy in Mexico recently
quipped that Britain’s post-Brexit message to the world, of unshackling itself from an old
relationship and heading out into the world to forge new ties, was being well received in Mexico.
“If I said these things in Germany they would laugh at me,” the official jokes. Countries like
Britain will always find a receptive audience in Mexico, which has shown that it can be a good
partner when the other side is dealing in good faith.

EUROPE (JUNE 28TH)

Britain

British politicians are naïve about the politics of trade

FREE trade is being discussed in Britain more passionately than at any time in living memory.
Brexit has encouraged politicians in both the Leave and Remain camps to articulate to the British
people why free trade matters. Yet contradictions lie at the heart of all this discussion.

Many of those in favour of Brexit argue that the project will be good for the economy. The
argument goes that, freed from the European Union’s common external trade policy, Britain can
strike direct trade deals with countries across the world, including America and Australia.
Brexiteers, including Liam Fox, the international-trade secretary, promote the notion of “global
Britain”, which some have interpreted as harking back to the days of empire.
The Remain camp is just as keen on free trade, but makes a different argument. Remainers say,
rightly, that the damage caused by Brexit will vastly outweigh any potential gains from future
trade deals with other countries. Many MPs in both Labour and the Conservative Party wish
Britain to remain a member of the European single market, or at least the customs union, which
would allow goods to be traded more easily.

Yet is it right for both parties to assume that Britons want free trade? The evidence suggests
perhaps not. Roughly 50% of Brexit voters think that Britain should limit imports to protect the
British economy, according to data from NatCen Social Research, which gauges public opinion.
China is not the economic bogeyman that it is in America—not yet, at least. But there is plenty of
evidence to suggest that Chinese imports have destroyed jobs in poorer parts of the country.

Reaching a trade deal with a country like America could trigger an unexpected political backlash.
Last summer a row blew up over the question of chicken imported from America that is doused
in chlorine. Left-leaning types also worry about American firms competing for contracts to
supply the National Health Service. “Better trade opportunities with the wider world” was chosen
by only 9% of Leave voters as the main reason for voting for Brexit, far behind legal
independence and cutting immigration, according to ICM, a pollster.

And there is a contradiction in the rhetoric. Ministers take a gung-ho approach to free trade, but
constantly fret about the effect of immigration, even though import competition might threaten
British jobs and wages in much the same way. If the government really is keen on a global
Britain, then it needs a liberal immigration regime, too.

France

Macron: a pragmatist in a hostile environment

SHORTLY after Emmanuel Macron was elected president in May 2017, his new government
nationalised a French shipyard in order to thwart an Italian takeover. To those who had imagined
that Mr Macron was a liberal free marketeer and staunch advocate of globalisation, it was a
sobering moment. In the end, French state ownership proved temporary, and a Franco-Italian deal
was swiftly renegotiated. But the affair was an early reminder that, even under an English-
speaking globalist president, France has its own approach when it comes to foreign trade and
investment.

Mr Macron approaches the subject with a mix of old-style Colbertism, which has traditionally
shaped French thinking on markets, and pragmatism. Although a broad defender of globalisation,
he argues that political leaders ignore those who lose from free trade at their peril. Polls suggest
that the French are among the most hostile in Europe to free markets, considerably more so than
Germans, Americans and Britons. Prospective free-trade deals, such as that between the
European Union and Mercosur, tend to be deeply unpopular in France. “Capital in the Twenty-
First Century” by Thomas Piketty, a French economist, became a bestseller abroad before it made
a real splash at home, partly because his observations about inequality in advanced capitalist
economies were part of consensus thinking in France.
Moreover, Mr Macron knows first-hand that the political consequences of neglecting
globalisation’s losers are real. Two-fifths of French voters in 2017 backed either the far-right’s
Marine Le Pen or the far left’s Jean-Luc Mélenchon for president, each of whom promised to put
up barriers in order to block cheap imports and stop factories closing. Mr Macron, by contrast,
argued that France, which has more Fortune 500 companies than Germany, benefits from its
openness to trade. During the campaign he stood out, for example, for backing the EU’s
unpopular trade deal with Canada.

Mr Macron does argue, however, that the balance between markets and regulation needs to be
recalibrated, and that those who lose out from free trade must be reassured that their concerns are
being taken seriously. This is why his mantra is a “Europe that protects”. In order to keep Europe
open, Mr Macron argues, people therefore need to feel that they are also being protected.

By this he means that trading partners have to accept reciprocity, that European consumers need
to be protected from food they judge unsafe, that Europe should be able to screen Chinese
investment in strategic sectors, or that American tech giants should be taxed properly. Hence his
call for the creation of a European “trade prosecutor” to supervise “fair trade”. In a landmark
speech to the Sorbonne last year, Mr Macron declared that “an open world is only worth it if the
competition that takes place there is fair”. The purists might say he only pays lip service to the
idea of free trade; he would probably accuse them of being politically naïve.

ASIA (JUNE 29TH)

China

The world’s biggest exporter likes free trade, but not globalisation

ONE of the great oddities about the world today is seeing China’s Communist Party chief, a man
who calls for more study of Marxism, become a leading defender of free trade on the global
stage. Xi Jinping enthused the Davos crowd in 2017 with his full-throated advocacy of an open
world. “Those who push for protectionism are shutting themselves inside a dark house,” he said.
“They have escaped the rain and clouds outside, but also missed the light and air.”

Why has China seemingly taken up the mantle of free trade?

Opportunism is a small part of the explanation. With Donald Trump pushing for America First,
China has rushed to fill the void and cast itself as the guardian of international co-operation. But
it would be wrong to dismiss this entirely as cynicism. There is a conviction, widely held in
China, that free trade truly is the best choice for the world.

On one level this is unsurprising. Over the last few decades, China has benefited more from the
international trading system than just about any other country. Its share of global exports has
risen to 13% today from 4% on the eve of its accession to the World Trade Organisation in 2001.
Coastal areas in Guangdong, Fujian and Zhejiang provinces—the parts of the country most tied
into global supply chains—are now among China’s most prosperous. That the world’s biggest
exporter likes free trade is only natural.

Yet China’s enthusiasm also raises two less obvious points. First, Chinese opinions about free
trade were in the past much more mixed. In the 1990s many in China opposed joining the WTO.
Conservative officials saw it almost as a conspiracy to smuggle in Western values. Rustbelt
workers, especially in the north-east, where thousands of lossmaking state companies had been
closed, feared the impact.

The broader support for free trade in recent years reflects China’s success in helping those left
behind, at least up to a point. The government ploughed money into infrastructure and education,
giving deprived areas chances to hitch on to global trade. As wages have risen in coastal areas,
exporting industries have shifted inland. A highly mobile population and flexible labour market
are also important. Some 250m people are part of China’s “floating population”, going wherever
jobs happen to be. Many would settle permanently in wealthier cities, but the government does
not allow them to do so.

Second, China’s embrace of globalisation—a concept much broader than just the trade in
goods—is far more limited. The government restricts the flow of people: it is virtually impossible
to immigrate to China and the country takes in next to no refugees. It restricts the flow of money:
capital controls make it hard to move large amounts of cash in and out of the country. It restricts
the flow of services: from payments to accounting, China keeps foreign firms to the margins. And
it restricts the flow of ideas: the Great Firewall sequesters its internet from the rest of the world.
To borrow Mr Xi’s metaphor, China’s house is rather dark after all.
Japan

From a reluctant globalist to a champion

FEW countries have believed as firmly in closed markets as Japan. In the 17th century, its rulers
feared that foreign merchants and missionaries would upset the delicate balance of power within
the country. Their “seclusion decrees” barred Japanese ships from travelling to foreign lands and
threatened to execute any Japanese returning from them.

Japan’s doors eventually opened—from the outside. The distance separating it from the world
was diminished by new inventions, the Dutch king pointed out to Japan’s shogun in 1844, and “a
nation that tries to hold itself aloof from this process risks the enmity of others.” That enmity
duly arrived in 1853 when Commodore Matthew Perry’s “black ships” appeared in Tokyo bay,
demanding permission to trade. External pressure (gaiatsu) has played a controversial role in
opening Japan ever since.

Before its defeat in the second world war, Japan conquered foreign lands with military might.
After the war, it conquered foreign markets with its remarkable manufacturing prowess.
Servicemen became salarymen, joining the ranks of corporate “national champions” that took
great pride in their exporting success. In the early 1960s one firm’s workers and bosses began
each day with a song exhorting themselves to build a new Japan by “Sending our goods to the
people of the world / Endlessly and continuously”.

Imports remained mostly unsung. The Japanese are famously curious about (and appreciative of)
foreign items, but can be quick to doubt their quality and safety. From 1960 to 2006, imports
never exceeded 15% of Japan’s GDP. (In China, by comparison, they reached 28%.)

American exporters, in particular, chafed at the “structural impediments” that kept them out of
the Japanese market. A foreign manufacturer might find that its Japanese rivals owned the
distribution networks required to reach customers, or that regulations inhibited the proliferation
of large shops that were more likely to stock foreign brands. The trouble, an American satirist
wrote, is that when the “gallant” Commodore Perry kicked open the door, we didn’t go in; they
came out.

One market that remains particularly secluded is agriculture. Indeed, some Japanese would
hesitate to describe it as a market at all, viewing farming as a core part of their culture (and their
national security), not merely part of their economy. Land reforms, encouraged by Japan’s post-
war American occupiers, left the country with small, labour-intensive farms. Cultivators were too
feeble to compete in world markets, but too numerous to ignore in policymaking. In 2005 Japan’s
import duty on rice (¥341 per kg) was equivalent to a tariff of 778%.

As Japan’s economy has slowed and lost some appeal to foreigners, outside pressure has eased.
But the same loss of momentum has created internal pressure for reform. In recent years, Japan
has become a newly vocal champion of free trade. In 2013 it joined talks on the Trans-Pacific
Partnership (TPP), a trade deal between Pacific-rim nations, and it is now one of only seven
countries that is part of both the TPP (which excludes China) and the proposed Regional
Comprehensive Economic Partnership (which excludes America). It has signed a trade agreement
with the European Union. And after America withdrew from the TPP, Japan helped persuade the
remaining members to carry on regardless, thereby salvaging a deal.

The Japanese public’s support for free trade, as measured by surveys, is not especially high. But
nor has it dropped sharply over the past two decades, as it has in America. Many Japanese remain
susceptible to the comforts of seclusion. But the country can no longer be accused of holding
itself “aloof” from the closer integration of nations.