The U.S. played a major role in triggering the Great Depression by enacting the Smoot Hawley Tariff Act. That Act raised tariffs to the highest level in American history. Other countries responded with their own protectionist trade policies, and the global system of trade and finance collapsed.
The U.S. has launched a new era of protectionism referred to as the ‘New Washington Consensus’. Both political parties support higher tariffs and other protectionist measures targeting China, but also imposed on other countries, including our allies. These policies have triggered geoeconomic fragmentation, just as they did during the Great Depression. Declining global trade and economic stagnation are again facilitating more authoritarian regimes.
The ‘New Washington Consensus’ of protectionist trade policies is fundamentally flawed. These policies may protect U.S. industries and jobs in the short term, but they also slow down structural change and productivity advance in the long term. There is now overwhelming evidence of the benefits of free trade. Lower tariffs reduce costs to importers and lower prices to consumers. Firms have more incentive to procure competitive imports and diversify supply chains. Free trade creates incentives for firms to improve productivity to compete in global markets. The question is how to restore free trade and investment in the current environment of geoeconomic fragmentation.
The answer is plurilateral free trade agreements. Multilateral free trade agreements through the World Trade Organization have bogged down over issues such as government subsidies and intellectual property rights. Countries now find that plurilateral negotiations with a small group of counties are more productive. These negotiations can distinguish between government restrictions where they disagree, for example trade that impacts their national security, and trade restrictions on other products that are negotiable.
Perhaps the most important of these free trade agreements is that between China, South Korea, and Japan, first proposed 2002. Negotiations in recent years have taken on a new life as these countries shifted from combatants to competitors in the new Cold War. A good example is the fiercely competitive semiconductor industry, The policies pursued by these countries to protect and promote their semiconductor industry has been described as a trade war.
The free trade agreement between China, South Korea, and Japan is especially important from an historical perspective. Leading up to World War Two the Japanese military claimed that protectionist trade policies pursued by the U.S. and its allies cut Japan off from vital supplies of natural resources. The late economic historian Yasukitchi Yasuba refuted this argument, showing that Japan was able to import natural resources and never suffered severely from a shortage of natural resources before the Manchurian Incident of 1931. Japan’s military expansion in the 1930s caused an artificial shortage of natural resources.
Japan appears to have learned its lesson. Japan threatened to block South Korea from obtaining crucial Japanese materials used in semiconductors, but Japan has recently dropped that threat. The free trade agreement has not yet resulted in free trade but has led to a de-escalation of trade wars between the two countries.
We should not be surprised that authoritarian governments continue to use protectionist trade policies as an excuse for war. Russia has weaponized international trade and investment to support its war in the Ukraine. China can influence Russia, and we can hope that China will use that influence to deescalate the Ukraine War and ultimately help bring peace to that region.
When plurilateral trade negotiations keep supply chains open, countries can’t use protectionist policy as an excuse for military conflict. Even countries with a history of military conflict, such a China, South Korea, and Japan have found common ground in plurilateral trade negotiations.
Milton Friedman was right that free trade can deescalate conflicts between counties and set the stage for more democratic institutions. South Korea and Japan are well along in this transformation from authoritarian regimes to democratic and pluralist societies, we can only hope that this sets a precedent for China as well.
We should reject the ‘New Washington Consensus’ that supports trade restrictions and geoeconomic fragmentation. The U.S. should support agreements, such as the free trade agreement between China, South Korea, and Japan, that can help keep supply lanes open. Plurilateral free trade agreements hold the promise of turning swords into plowshares.
Dr. Barry W. Poulson is on the Board of Directors of the Federal Fiscal Sustainability Foundation.