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FUSION

Getting Real About Free Trade

Samuel Gregg


In June 1946, Switzerland’s newspaper of record Neue Zürcher Zeitung published a long two-part article entitled “The Centenary of British Free Trade.” Its author, the German market-liberal economist Wilhelm Röpke, pointed out that Britain’s decision to cast off tariffs unilaterally in 1846 had been a kind of miracle. Against enormous domestic opposition, Britain’s prime minister Sir Robert Peel, backed by a coalition of Tory, Liberal and Radical MPs, opted for a new economic world by successfully persuading Parliament to repeal the protectionist Corn Laws.

“To the jubilant contemporaries and to several generations thereafter,” Röpke stated, “it appeared as the natural and lasting triumph of reason, of peace, of harmony among nations, and of the forces of material progress.” Indeed, “Free Trade, Goodwill, and Peace Among Nations” had been the slogan around which the most famous free trade advocate of the time, Richard Cobden, assembled a coalition ranging from hard-nosed industrialists to Evangelical preachers. Perhaps most significantly, that same alliance acquired mass support: a movement that went on, as Frank Trentmann illustrates in his book Free Trade Nation, to exert enormous cultural influence in Britain for decades to some.

Cobden and his many followers never hid their expectation that trade liberalization would eventually usher in an age of universal peace. As free trade encouraged ever-deepening specialization across borders, Cobden thought, no nation would be self-sufficient enough to engage in war. Economic ties would grow between individuals and businesses across borders, making more and more people, and therefore countries, interdependent. Over time, both the capacity and will of nations to wage war would dissipate as the economic and political costs of breaking these trade connections grew.

Reflecting on these sentiments 100 years later, Röpke—himself an outspoken free trader in an age of protectionism—observed that subsequent history made Cobden’s forecasts look rather naïve. The economic benefit of trade mattered, he acknowledged, but it was just one of many factors that nation-states consider in their interactions with others. Trade sometimes helped to foster peaceful relations, but it was rarely enough to stop war.

By 1913, for example, Europe’s economies had become relatively integrated. In his book The Sleepwalkers: How Europe went to War in 1914, the Cambridge historian Christopher Clarke shows that governments from London to Saint Petersburg understood that a disintegration of these economic interdependencies through a continental war would bring about enormous economic hardship. Yet such awareness did not suffice to prevent the catastrophe of July 1914 or four ensuing years of brutal fighting from the Atlantic to the Ukraine. European governments were prepared to subordinate the recognized benefits of expanding trade to what they regarded as more weighty considerations, whether ideological, political, military, ethnic, cultural, or religious in nature.


Cobdenite Idealism versus Smithian Realism


Röpke did not question the good intentions of Cobden and his followers. Nor did he deny that free trade had delivered on its economic promise. The results in terms of increased growth and efficiency were spectacular. While Britain benefited immensely from its embrace of free trade, Röpke also argued that it was “equally true that British free trade was an essential foundation of the world economy such as developed, in all its impressive strength and breadth, and with all its intricate institutions, in the course of the nineteenth century.”

Röpke went on, however, to conclude that that “the underlying social philosophy” associated with the Cobdenite free-trade-leads-to-peace outlook had been exposed by events as insufficiently appreciative of important realities of the human condition. “The dawn of the golden age of peace, and the social philosophy that regarded free trade as the guardian in international concord,” Röpke wrote, “seems to us as faded as the paper on which it was printed.” Among other things, two world wars in thirty years had illustrated that there are many causes of international conflict that widespread trade had proved unable to neutralize.

For these reasons, Röpke maintained that free traders did not only need to rethink how they made their arguments. They also had to be more modest about what free trade can achieve. Certainly, he stated, “We may still defend as relatively more reasonable than others that the decision as to what individual nations produce or not should be left to free international trade.” But the case for free trade, Röpke believed, had to be more aware that nations, national-sovereignty, and the propensity of states to pursue what they regarded as their national interests were facts of life that were not going away anytime soon. Human relations, whether between individuals or countries, were simply more complicated than some nineteenth-century free traders had supposed.

Ropke was in effect making a more “conservative” case for what is typically regarded as a “classical liberal” commitment. The irony is that the outlines of precisely such a case can be found in the writings of important father-figures of the classical liberal tradition.

Cobden was fond of invoking Adam Smith in support of his peace through trade arguments. Many believed that there was clear continuity between the two men’s views of nations, trade, the nation, and international affairs. Attention to Smith’s writings, however, illustrates the questionable nature of this claim.

In the first place, Smith was skeptical that moral sympathy extended much beyond one’s nation. Smith did not argue that our concern for others simply stopped at the border. Smith did, however, believe that our sympathy for others became considerably weaker once it moved beyond national boundaries.

Empathy for humanity as a whole and love of country were not, Smith believed, incompatible. Nonetheless he viewed patriotism as more natural. “The love of our country,” Smith stated, “seems not to be derived from the love of mankind. The former sentiment is altogether independent of the latter, and seems sometimes even to dispose us to act inconsistently with it.” A person’s nation, according to Smith, was more part of his everyday cultural, historical, linguistic, and cultural reality than mankind as a whole. Putting your country’s well-being before that of other nations was therefore normal. Smith even regarded fighting and dying for your country as profoundly honorable. The patriot who does so acts, Smith comments, “with the most exact propriety.”

That does not mean that Smith was blasé about the destructive power of war. Part V of his The Wealth of Nations describes in considerable detail the immense burdens and misery that war inflicts on nations. Yet Smith agreed with David Hume that conflict was part of the human condition. He did not think that international affairs could be inoculated from such truths.

Smith certainly held that increased trade between nations free of mercantilist restrictions would tend to ameliorate relations between them. The beggar-thy-neighbor conception of wealth promoted by mercantilism encouraged the rulers of nations to think their countries’ prosperity would only come at other nations’ expense. This outlook could only encourage rivalries between states, whether it concerned territorial acquisitions in Europe or acquiring colonies and trading rights in the Americas, Africa, and East Asia. Such competition all too easily and often spilled over into outright violence, epitomized in Smith’s lifetime by the Seven Years War France and Britain fought for supremacy over parts of the world as distant as North America and India.

Free trade between nations, Smith acknowledged, would weaken many of these sources of conflict, not least by permitting different countries discern what we would call their comparative advantages and start to realize across national boundaries the division of labor that is at the heart of wealth creation. Such interdependencies, Smith thought, would tend to promote more tranquil relations between nations.

Nevertheless, Smith remained skeptical of the notion that augmented and liberalized trade across borders would somehow nullify armed conflict between nations, let alone dissolve national borders. On the contrary, there were circumstances where, he thought, trade liberalization might exacerbate the potential for war. In The Wealth of Nations, Smith suggested that the growth in a nation’s economic resources arising from an increasingly efficient “domestick industry, from the annual revenue arising from its lands, labour, and consumable stock” would permit that country to support “fleets and armies in distant countries” and “maintain foreign wars there.”

A practical example of Smith’s hypothesis turns out to be nineteenth century Britain. Industrialization was crucial to Britain’s rise to the status of economic superpower in the nineteenth century. But as Ropke noted in his Neue Zürcher Zeitung article—and subsequent long-term empirical research indicates—Britain’s economic growth accelerated after the repeal of the Corn Laws. The sheer efficiency of British industry spurred on by the unilateral liberalization of trade enabled British goods and services to out-compete their rivals in world markets, including in those countries that tried to use tariffs to put British goods at a price disadvantage.

The same economic growth permitted London to sustain the Royal Navy, which allowed Britain to uphold what Röpke called the Pax Britannica across the world’s oceans throughout the nineteenth century. Absent such wealth, it is doubtful that Britain would have had the capacity to project military power with relative ease across the globe, whether it was low-intensity conflicts like the Opium Wars or bigger undertakings like the Crimean War. Free trade effectively enhanced Britain’s ability to fight wars on such a geographical scale precisely because it helped Britain acquire the economic capacity to do so. That is precisely what Smith predicted.

There is also considerable empirical evidence to support Smith’s realist case for free trade over that of Cobden’s idealistic assertion of a direct link between between free trade and perpetual international peace. In his study of the free-trade-inexorably-leads-to-peace thesis, the Dutch international relations scholar Edwin van de Haar observes that the claim that “settled democratic countries do not fight each other” is far “empirically more robust” than the claim that trade promotes peace. Having exhaustively surveyed the existing empirical work on the latter claims, van de Haar maintains, “[t]he best one can say is that the protection of trade relations is sometimes one of the factors in the decision not to wage war. Nothing less, nothing more.”


An End of Nations?


These observations about the relationship between free trade, the pursuit of national interest, and international relations play directly into contemporary discussions about how to advance the case for free trade. By that, I mean less the technical and legal mechanics of how trade is liberalized through treaties or multilateral agreements. Rather, I have in mind the manner in which people are persuaded as to the benefits of free trade in a world in which there is no reason to suppose the disappearance of international conflict.

After Communism’s collapse in Eastern Europe in 1990, arguments in favor of free trade—including in the United States—became, for better or worse, associated with notions of economic globalization advancing political liberalization throughout the world. Appeals to American national interests were certainly made. But presidents including Bill Clinton and George W. Bush did not refrain from invoking the ostensive link between economic and political reform to bolster public support for trade liberalization.

In some of the same arguments, free trade was associated, at least rhetorically, with hopes for the decline of the nation-state. In 1984, for example, the Wall Street Journal editorial page, then led by Robert L. Bartley, editorialized in favor of an amendment to the U.S. Constitution which would state, “There shall be open borders.” Seventeen years later, Bartley reminded readers of this in a 2001 article in which he advocated the discussion of open borders between NAFTA nations.

To say that such claims grated upon some significant segments of American opinion is an understatement. One of conservative America’s most outspoken protectionists, Patrick J. Buchanan, insisted that such words indicated that “Bartley accepted what the erasure of America’s borders and an endless influx of foreign peoples and goods would mean for his country.” That implied, in Buchanan’s view, an end to America as a sovereign nation. Buchanan also contended that the implications of Bartley’s alleged claim—“I think the nation-state is finished”—were likely to be resisted by those Americans who had been adversely affected by trade deals with countries ranging from Mexico to China.

The irony is that Buchanan and Bartley were both incorrect to link free trade with the alleged atrophy of the nation-state. In fact, there is little evidence of the nation-state being marginalized in the wake of economic globalization.

From the late-1970s onwards, the depth and breadth of trade liberalization accelerated across the world. Economies became more integrated across national boundaries. However, the locus of international politics did not shift to international organizations like the United Nations or supranational bodies like the European Union. The primary players in global affairs remained large powerful nations like the United States, China, Russia, Japan, France, Germany, Britain, Brazil, and India. Alliances continued to be formed by nations as a way to protect themselves against actual or perceived threats from other nations. Even as momentous an event as China’s entry into the World Trade Organization was ultimately determined by one nation-state, the U.S., agreeing after two years of head-to-head negotiations between Washington and Beijing.

As for the WTO, its 164 members have only been able to conclude a

a multilateral trade agreement twice between its establishment in 1995 and 2022. That slowness and relative lack of success on the WTO’s part underscores the enduring determination of nation-states to pursue what they perceive to be their distinctive interests, as well as the susceptibility of governments to lobbying by groups who do not wish to be subject to the disciplines of global competition.

Certainly, trade liberalization reduces regulation by national governments of the movement of goods, services, and capital. As the British economist David Henderson stated in his 1985 BBC Reith Lectures, any move in this direction tends to reduce the sphere of government intervention into national economies and the global economy more generally. But, Henderson cautioned, reducing the scope of government intervention does not involve the disappearance of sovereignty or national identity. During what has been called “the first age of globalization,” Henderson wrote, sovereignty did not cease to matter. Even at the height of the trade liberalizations that marked much of the nineteenth century world, “the international system was primarily a system of states. The political significance of frontiers was not diminished by the fact that, generally speaking, goods, money, and people could move across them unhindered.” The same, Henderson claimed, held true at the end of the twentieth century.


Trade for America


The validity of this last observation was confirmed by the reactions of national governments to the 2020 Covid pandemic. These illustrated the ongoing capacity of sovereign states to shut their borders and dramatically limit the passage of goods and people within and across those boundaries at very short notice.

Given such facts, those seeking to persuade Americans to embrace the case for free trade today would be wise to focus on the benefits that it delivers for nationsthat choose to reduce trade barriers between themselves and the rest of the world.

This was well-understood by a good number of American free traders in the second half of the nineteenth century as they struggled to overturn a protectionist ascendancy over American trade policy. In The “Conspiracy” of Free Trade: The Anglo-American Struggle over Empire and Economic Globalization, 1846-1896¸historian Marc-William Palen observes that while there were many “idealistic, absolute free-trade intellectuals” in America in the Cobdenite mode, there were also “more realistic pragmatists.” Their case for free trade was humbler in the Smithian and Röpkean sense; their focus was also less upon global harmony than upon the potential of free trade to serve America’s interests.

Therein lies the foundations for a more modest case for free trade in America. One pillar of such a case is the benefits that trade liberalization brings to American consumers in the form of lower prices for goods and services. Whether driven by alowering of tariffs on imported goods or, less directly, through associated productivity gains by domestic and foreign firms, the evidence for this result is overwhelming.

Importantly, such benefits are proportionately greater for less-wealthy American consumers. Their income does not only buy more when prices fall. People on lower incomes also tend to spend proportionately more on internationally traded goods like agricultural and manufactured products than richer Americans, who generally expend more of their income on goods like education that are less traded across borders.

Trade openness also provides American companies with greater access to markets in which to sell their products. The greater the likely market, the more the potential for sales and profits. The same trade openness brings more competitive pressure to bear upon the U.S. economy. Increased competition is a good thing: it promotes greater adaptability, more resilience, ongoing efficiencies, and incentives to work harder, be entrepreneurial, and lower costs while maintaining profit margins.

As for American workers, trade openness has a positive effect on labor productivity. That matters because a higher degree of average labor productivity means higher average wages in a developed economy like the United States. As trade becomes freer, increasing numbers of workers gravitate to more productive and often less physically intensive economic sectors, earning higher nominal wages as they do so. At the same time, the real wages of American workers increase insofar as they are able to buy more things which have become less and less expensive.

Last, there is a crucial benefit of free trade that the United States would not want to do without: trade liberalization magnifies the rate of GDP growth. There is no shortage of solid empirical studies illustrating this fact. A pre-Covid IMF study, for example, states that “In advanced economies . . . the rising living standards that came with greater trade openness lent widespread support to the view of trade as a key engine of economic growth.” Higher growth in America translates into expanding wealth, jobs, and consumption for Americans. Furthermore, trade across borders significantly contributes to increases in per capita income (average income earned per person in a given area in a specified year). The same IMF report assessed that “a one percentage-point increase in trade openness raises real per capita income by 2 to 6 percent.”


Free Trade Realism


Numerous other long-term analyses of trade liberalization’s positive effects upon any nation that embraces it could be cited. But for our purposes, what matters about these benefits is that 1) they are of the practical variety that illustrate how free trade promotes the well-being of millions of individuals; and 2) they do not overburden the case for free trade with promises it cannot fulfill.

Trade liberalization may not lead inexorably to universal peace. But it does promote very particular and tangible goods for countries, not the least among which is the fact that the wealthier a country becomes, the stronger and more influential its place in world affairs. Protectionism, by contrast, gradually weakens a country by 1) rendering it less competitive; 2) diminishing the pace and scale of economic growth; 3) encouraging legislators and citizens to be less attentive to the willingness of other people in far-off lands to work harder or be more entrepreneurial than them; and 4) making its citizens more subject to the whims of domestic special interests seeking privileges for which everyone else pays.

This, I submit, is the “conservative” argument for the free trade that classical liberals have always valued—and that needs to be made to Americans. It is a case which is sensitive to unchanging realities about human nature and the behavior of countries as well as significant lessons that can be drawn from history. The argument is also likely to be more persuasive in a time in which the nation-state and the idea of national sovereignty, far from disappearing, are underscoring their continued relevance.


Samuel Gregg is Distinguished Fellow in Political Economy and Senior Research Faculty at AIER. His most recent book is The Next American Economy: Nation, State, and Markets in an Uncertain World.

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