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The Benefits of Free Trade Are Canceled Out by Domestic Interventionism

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Tags Free MarketsGlobal EconomyProtectionism and Free Trade

12/05/2019

Foreign policy commentators live in their own bubble. The WTO’s credibility is gone and its survival uncertain due to its lack of impact on world trade over the last two decades. A China vs. USA trade war is still growing and the economic community of European states is in its worst-ever shape. Yet no one stops to wonder if all these failures have anything to do with the kind of economic integration they propose. In fact, the media is now childishly excited about the ASEAN-led Regional Comprehensive Economic Partnership (RCEP), a Trans-Pacific Partnership surrogate many years in the making.

What no one recognizes is that the common reason for the breakdown of world economic relations is the combination of interventionist domestic policies and government-led, top-down, faulty trade integration, which serves only interest groups and is subject to perverse incentives. The positive effects of inter-governmental multilateral trade agreements are minor at best. Their negative effects, however, such as stifling global trade, diversion of trade flows, or increasing red tape, have been growing at an alarming rate.

Trade agreements have thus become obsolete tokens of negotiation in larger geopolitical disputes, protectionist tools for managing and interfering with global trade flows. RCEP’s tentative provisions serve as a great illustration of the adulteration and vitiation of trade deals. For example, RCEP would allow and encourage poorer members to “proceed cautiously and gradually in lowering tariffs on manufactured goods… [over] adjustment periods of up to 25 years” (The Economist, 2019). However, it is precisely the poorer members of such agreements who benefit from reducing their tariffs to zero. According to Mises (1990), “their own policies are the main obstacle to any improvement and economic progress. There cannot be any question of imitating the technological procedures of the capitalistic countries if there is no capital available. Whence should this capital come if domestic capital formation as well as the inflow of foreign capital are sabotaged?”

RCEP would also allow India to “impose some sort of ‘safeguard’ tariffs if imports surged too sharply” (The Economist, 2019). In other words, India could easily withdraw their already weak commitment to this economic partnership without incurring any direct consequences — allowing them to have their managed trade cake and eat it too. However, despite this mollification, India remained reluctant to commit and Narendra Modi refused to sign the current draft agreement, citing the trade deficit with China, the danger to Indian farmers, Ghandi, and his own conscience.

Lastly, the text of the RCEP is littered with “non-committal phrases… [such as] "members shall endeavour to" rather than "members shall’” (The Economist, 2019). As The Economist argues, “in these sort of agreements do and do not are not the only options. There is plenty of "try" (The Economist, 2019). But no rose-colored glasses can make free trade anything but a black and white issue. To reference Yoda again, this is why you fail. Either trade is entirely free, and thus works to bring about prosperity and economic growth, or it is government-managed, thus not free, and bound only to bring about more intervention and economic distortions. In matters of economic freedom, there is no try.

Preparations for the Regional Comprehensive Economic Partnership are now 8 years old and 30 negotiation rounds have already taken place. A fantastic leap of faith is necessary to imagine that, once signed, this agreement will have any beneficial impact, or will indeed be managed efficiently. A leap of faith that should be impossible for any minimally informed and honest commentator. Sadly, much like true free trade agreements, there are few such left.

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Dr. Carmen Elena Dorobăț is a Fellow of the Mises Institute and Senior Lecturer (Associate Professor) at Manchester Metropolitan Business School in the United Kingdom. 

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