The debate about free trade versus protectionism has been going on for 500 years, all through the history of our modern world-system. The argument is favor of free trade has always been that it results in maximum competition, therefore maximum efficiency of production, therefore reduction of prices, and ultimately benefits to the consumer. The argument in favor of protectionism has always been that free trade has very negative consequences for various national economic situations, both in the short run and the long run. In the short run, it increases unemployment and causes the failures of local enterprises. And in the long run, it locks weaker countries into lower-profit types of economic activities.
Of course, both sides are right up to a point. But the abstract virtues of free trade versus protectionism never determine what actually happens. Ultimately, the question is as much political as it is economic. Those countries who are at a given moment particularly efficient at productive activities are normally the ones who proclaim the virtues of free trade. Free trade obviously serves their national interests. It means they can sell their products in foreign markets without the penalty of tariffs or other barriers. It means they can invest surplus capital in other countries. Those countries who are moderately strong but still weaker than the strongest are normally the ones who try to be protectionist. They feel that, if they can protect their internal markets for a while from the competition of producers in the strongest countries, they can improve their own efficiencies and develop a sufficient internal market to withstand open competition. For them, it is a matter of time. The protection is temporary. Truly economically weak countries are usually too weak politically to get away with protectionism.
The ambiguities arise when we look at the strong countries who proclaim the virtues of free trade. The strong countries are in favor of free trade only up to a point. For example, in the seventeenth century, the Dutch (then called the United Provinces), who were then the most efficient producers (and traders) in Europe, preached the virtues of free trade to a weaker England and France. But that didn't mean that the Dutch didn't protect certain markets. In 1663, Sir George Downing, a British statesman, bitterly noted about Dutch policy: "It is mare liberum [open seas] in the British seas but mare clausum [closed seas] on the coast of Africa and the East Indies." The British had to fight three maritime wars with the Dutch to even the playing field in world trade for them.
This story is being repeated today. The United States after 1945 was the most efficient producer, and of course favored free trade. Still, in order to strengthen politically their alliances against the Soviet Union, the U.S. allowed western Europe, Japan, Taiwan, and South Korea to engage in certain protectionist processes. This strengthened these countries economically up to a point. When, as of the 1970s they became highly competitive with the United States, the U.S. began to complain about their protectionist policies. But precisely because the U.S. had become relatively weaker economically, it also strengthened its own protectionist policies amidst a declining manufacturing sector. The U.S. government, like other governments, was faced with internal political pressure to preserve jobs and profits for local entrepreneurs.
The United States turned its eyes towards what it called "emerging markets," which meant some of the larger countries in the world's South - countries like Malaysia and Indonesia, India and Pakistan, Egypt and Turkey, South Africa and Nigeria, Brazil and Argentina. It saw these countries as outlets for U.S. products - manufactures, information services and biotechnology - as well as for financial transactions. But these countries had all been devoted to a developmentalist ideology which led them to engage in certain protectionist policies. So the U.S. explained to them that in an age of "globalization" such practices were evil and counterproductive, The emerging markets had to open themselves to the free market, meaning to U.S. (and other) investments and activities.
The major tools to obtain compliance with this new regime were the International Monetary Fund, the U.S. Treasury, and the World Trade Organization (WTO), which would lay down enforceable rules of free trade. These rules of course were meant to apply to others, not really to the United States. The problem with rules, however, is that others can also use them. When the U.S. (and western Europe) tried to extend these rules further to the so-called emerging markets, they found resistance at Cancun, where Brazil led a coalition of the middle powers insisting that rules worked both ways - that if the South were to lower barriers to free trade, the U.S. and the rest of the North must do so as well (see Commentary 122, Oct. 1, 2003). The U.S. refused to go along and hence Cancun was a failure.
But an even greater problem was lurking for the U.S. Europe (and others in the North) were very unhappy about U.S. protectionism, which hurt their own interests directly. When George W. Bush placed tariffs on steel, to protect U.S. manufactures in states that were electorally crucial to him (such as West Virginia and Ohio), the Europeans brought a case in the WTO Tribunal, charging the U.S. with violating the treaty. They won the case, and obtained the right to pose countertariffs, which they threatened to do against U.S. products important in other states electorally important to George Bush (like Florida and Michigan). As a result, George Bush swallowed hard, and revoked the steel tariffs. But the Europeans weren't through. They plan to use the same countertariffs if the U.S. does not end the tax breaks it gives U.S. corporations for their offshore operations. It seems these too violate the WTO treaty.
And, if this wasn't enough, when George Bush announced that he wasn't going to let the French, Germans, Russians, and Canadians bid on contracts to rebuild Iraq, it was immediately suggested that this violated the same WTO treaty. All of a sudden, the WTO - virtually a U.S. invention and cherished achievement - began to seem like an albatross around the neck of the United States. Free trade is marvelous of course, at least if one doesn't have to bear its negative costs oneself.
